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    FED Releases Stress Test Results and CECL Implementation Tool

    June 23, 2022

    The Board of Governors of the Federal Reserve System (FED) released results of the annual stress testing exercise for banks, along with a Current Expected Credit Losses (CECL) Expected Loss Estimator (ELE) tool.

    The CECL ELE is a spreadsheet-based tool that utilizes the loan-level data and management assumptions, as entered in by the financial institution management. The ELE tool provides automated calculations using the Weighted Average Remaining Maturity (WARM) method, one of many CECL methods accepted by the Financial Accounting Standards Board (FASB). The tool is intended to aid community financial institutions in calculating their CECL allowances. The launch of the ELE tool builds on the previous release of the Scaled CECL Allowance for Losses Estimator, or SCALE, tool. Together, the ELE and SCALE tools provide two simplified approaches to CECL calculations for smaller community financial institutions. Along with the tool, FED has also released the instructions and frequently asked questions (FAQs) on this tool. The ELE tool can be used as either a primary tool in the allowance for credit losses calculation or as a supplementary tool to existing CECL process. This tool provides fully viewable code and formulas to allow financial institutions to independently verify the ELE tool and adjust as deemed necessary by their management.

    The 2022 stress test results show that banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe recession. All banks tested remained above their minimum capital requirements, despite total projected losses of USD 612 billion. Under stress, the aggregate common equity capital ratio—which provides a cushion against losses—has been projected to decline by 2.7 percentage points to a minimum of 9.7%, which is still more than double the minimum requirement. This year's hypothetical scenario was tougher than the 2021 test, by design, and included a severe global recession with substantial stress in commercial real estate and corporate debt markets. This year, larger banks saw an increase of over USD 50 billion in losses compared to the 2021 test. A total of 34 banks participated in the stress test for 2022 compared to the 23 banks in 2021; therefore, the aggregate results reported for the 2022 stress test are not fully comparable with the 2021 stress test results. These stress tests evaluate the resilience of large banks by estimating their capital levels, losses, revenue, and expenses under hypothetical scenarios over nine future quarters. The individual bank results from the stress test will factor directly into a bank's capital requirements, mandating each bank to hold enough capital to survive a severe recession. If a bank does not stay above its capital requirements, it is subject to automatic restrictions on capital distributions and discretionary bonus payments.


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    Keywords: Americas, US, Banking, Stress Testing, Dodd Frank Act, Basel, Regulatory Capital, CECL, SCALE, ELE, Community Banks, FED, Accounting, IFRS 9, Allowance For Credit Losses, Warm Method, St Louis FED

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