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    US Agencies Issue Policy Statement on Allowance for Credit Losses

    May 08, 2020

    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.

     

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    Keywords: Americas, US, Banking, Accounting, Credit Risk, CECL, IFRS 9, Credit Losses Standard, Topic 326, ALLL, US Agencies

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