US Agencies Issue Policy Statement on Allowance for Credit Losses
US Agencies (FDIC, FED, NCUA, and OCC) issued a policy statement on allowance for credit losses and a guidance on credit risk review systems. The policy statement on credit loss allowances describes the measurement of expected credit losses using the current expected credit losses (CECL) methodology and updates the concepts and practices detailed in the existing supervisory guidance that remain applicable. The guidance on credit risk review systems discusses sound management of credit risk; a system of independent, ongoing credit review; and appropriate communication about the performance of the loan portfolio of an institution to its management and board of directors.
The final policy statement is intended to promote consistency in the interpretation and application of FASB credit losses accounting standard, as codified in the FASB Accounting Standards Codification Topic 326. This accounting standard is covered in the FASB Accounting Standards Update 2016-13 and it introduces the current expected credit losses (CECL) methodology. It describes the CECL methodology for determining allowances for credit losses that are applicable to loans held-for-investment, net investments in leases, and held-to-maturity debt securities accounted for at amortized cost. It also describes the estimation of the allowances for credit losses for an available-for-sale debt security in accordance with the Subtopic 326-30. The final policy statement becomes applicable to an institution upon the adoption of Topic 326 by than institution. After the Topic 326 becomes effective for all institutions, the agencies will rescind the Allowance for Loan and Lease Losses policy statements.
The final guidance on credit risk review systems outlines principles that an institution should consider when developing and maintaining an effective credit risk review system. It also describes a broad set of practices that can be used either within a dedicated unit or across multiple units throughout an institution to form a credit risk review system that is consistent with the safe and sound lending practices. The guidance is relevant to all institutions supervised by the agencies and aligns with the Interagency Guidelines Establishing Standards for Safety and Soundness; the interagency guidelines set out safety and soundness standards for insured depository institutions to establish a system for independent, ongoing credit risk review, including regular communication to its management and board of directors. The agencies have adopted the guidance on credit risk review systems post certain revisions to the proposed guidance from October 2019. The final guidance is intended to be flexible and consistent with CECL, but it does not incorporate the FASB Topic 326.
Related Links
Keywords: Americas, US, Banking, Accounting, Credit Risk, CECL, IFRS 9, Credit Losses Standard, Topic 326, ALLL, US Agencies
Featured Experts
Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.
Anna Krayn
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
SBV Releases Measures to Address Impact of COVID-19 PandemicRelated Articles
EBA Guide to Monitor Threshold for Intermediate Parent Undertakings
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
PRA Finalizes Approach to Supervision of International Banks
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
FCA Issues PS21/9 on Implementation of Investment Firms Regime
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
EBA Proposes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
IOSCO Proposes Recommendations on ESG Ratings and Data Providers
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
ESMA Group Issues Recommendations on RFR Switch in Interdealer Market
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
EC to Defer Application of SFDR Standards Till July 2022
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
EIOPA Consults on Reporting and Disclosures Under Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) proposed to amend the supervisory statement on supervision of run-off undertakings that are subject to Solvency II regulation.
BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
EBA Seeks Views on Proportionality Assessment Methodology
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
