Some of those adjustments might be related to differences in current conditions and conditions as of the reporting date of the peer data, which is already adjusted for reasonable and supportable forecasts, according to the Fed’s Frequently Asked Questions (FAQs) on SCALE:
Are there timing issues that must be considered when using the SCALE method? Yes. The SCALE method relies on proxy expected lifetime loss rates (e.g., expected loss rates reported on Schedule RI-C of the Call Report). Since the proxy expected lifetime loss rates would typically be based on information from the previous reporting period, there would be a lag between the proxy data and the reporting date. Management is responsible for considering whether a qualitative adjustment is necessary to reflect any changes in economic and business conditions at the reporting date that affect the collectability of bank’s financial assets that were not present at the time the proxy expected lifetime loss rates were calculated. This is particularly important during periods in which the economic environment is rapidly changing.
Regulators noted during the webinar that SCALE is neither an expected method nor a safe harbor. They also said this Excel-based CECL option doesn’t ensure compliance with U.S. GAAP.
The rollout of the SCALE tool “does not introduce any new regulatory guidance and does not change CECL requirements in any way,” said Lara Lylozian, Chief Accountant of the Federal Reserve Board of Governors. “We are just providing a simple spreadsheet-based option that you can add to your menu of options to consider to help you take a step forward in implementing CECL in a meaningful way, because 2023 will be here before we know it.”
Said Sarah Chae, Deputy Chief Accountant, Federal Reserve Board of Governors, “It is not a safe harbor method, as overall allowance process will continue to be a part of the examination review as it has always been in the past.”
