FED Releases Stress Test Results and CECL Implementation Tool
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.
- Press Release on 2022 Bank Stress Test Results
- 2022 Bank Stress Test Results (PDF)
- Press Release on Tool to Implement CECL
- ELE Tool (XLSM)
- ELE Tool Background and Instructions (PDF)
- ELE Tool FAQs (PDF)
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
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
Skilled market researcher; growth strategist; successful go-to-market campaign developer
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Previous ArticleUK Treasury Sub-Committee Seeks Views on Strong and Simple Framework
NGFS Updates Address Short-Term Climate Scenarios and Transition Plans
The Network for Greening the Financial System (NGFS) is exploring the development of short-term climate scenarios to complement its existing scenario framework of long-term climate scenarios.
ISSB Updates Address ESG Issues while IASB Consults on Impairments
The International Sustainability Standards Board (ISSB) is seeking feedback, until August 09, 2023, on the exposure draft that sets out the methodology proposed by ISSB to amend the Sustainability Accounting Standards Board (SASB) Standards' metrics
ESRB Publishes Report on Cryptos and DeFi; ECB Updates on Digital Euro
The European Systemic Risk Board (ESRB) published a report that outlines the systemic implications of crypto markets and proposes policy options to address the risks stemming from crypto-assets and decentralized finance or DeFi.
EU Agencies Issue Updates on DORA, ESAP, and Crowdfunding Regulation
The European Supervisory Authorities (ESAs) published a discussion paper on their joint advice to the European Commission (EC) on proposals to specify criteria for critical information and communication technology (ICT) third-party service providers
UK Authorities Issue Updates, Finalize Policy on Model Risk Management
The Prudential Regulation Authority (PRA) finalized the model risk management principles for banks, the policy statement PS5/23 on risks from contingent leverage, and PS4/23 on moving senior managers regime forms from the PRA Rulebook.
APRA Revises Implementation Timeline for Operational Risk Standard
The Australian Prudential Regulation Authority (APRA) updated the implementation date of the new cross-industry prudential standard CPS 230 on operational risk management
BCBS Consults on Basel FAQs and Amendments, Issues Other Updates
The Basel Committee on Banking Supervision (BCBS) published a report assessing implementation of the global Basel standards on net stable funding ratio (NSFR) and large exposures (LEX) in South Africa
EBA Announces Multiple Regulatory and Reporting Updates in April 2023
The European Banking Authority (EBA) published consultations on the amendments to the guidelines on risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision
FSB Issues Statement on USD LIBOR Transition, Issues Other Updates
The Financial Stability Board (FSB) released a report that offers insights into how financial institutions incorporate climate-related metrics into their compensation frameworks
ACPR Issues Updates on Reporting by Banks and on DLT Pilot Scheme
The French Prudential Supervisory Authority (ACPR) published reporting updates for the banking sector