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    US Agencies Consult on Policy Statement on Allowance for Credit Losses

    October 17, 2019

    US Agencies (FDIC, FED, NCUA, and OCC) are consulting on the policy statement on allowances for credit losses and on the guidance on credit risk review systems. The 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. The guidance discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution’s loan portfolio to its management and board of directors. The comments on each proposal will be accepted until December 16, 2019. The policy statement would become effective at the time of the adoption of the credit losses accounting standard.

    The proposed interagency policy statement describes the measurement of expected credit losses using the CECL methodology and updates concepts and practices detailed in the existing supervisory guidance that remain applicable. The policy statement describes the CECL methodology for determining allowances for credit losses that are applicable to financial assets measured at amortized cost, including loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures, in accordance with the Topic 326. It also describes the estimation of an allowance for credit loss for an impaired available-for-sale debt security in accordance with the Subtopic 326-30. Additionally, the policy statement includes and updates concepts and practices detailed in the existing Allowance for Loan and Lease Losses (ALLL) policy statements that remain relevant under Topic 326. After the Topic 326 becomes effective for all institutions, the agencies will rescind the ALLL policy statements. CECL becomes effective for most public financial institutions beginning in 2020 and FASB recently decided to defer the effective date of CECL for all other institutions to 2023. The policy statement will not create any new or revise any existing collections of information. Therefore, no information collection request will be submitted to the OMB for review. 

    The proposed guidance on credit risk review systems is relevant to all institutions supervised by the agencies and aligns with the Interagency Guidelines Establishing Standards for Safety and Soundness, which set out safety and soundness standards for insured depository institutions to establish a system for independent, ongoing credit risk review and including regular communication to its management and board of directors regarding the institution's loan portfolio performance. The guidance includes updates to reflect current industry credit review practices as well as terminology to align with the CECL methodology. The guidance outlines principles for use in developing and maintaining an effective credit risk review system. The extent to which the principles discussed in the proposed guidance are applicable depend on an institution's size, complexity, loan type, risk profile, and risk management practices. The proposed guidance also outlines characteristics of an effective credit risk rating framework, including the factors used to assign ratings to promote an effective risk review by qualified, independent parties. The proposed guidance will be issued as a stand-alone document and not as part of loan-loss reserve guidance, to highlight the important role of credit risk review systems in the overall risk management program of an institution.


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    Comment Due Date: December 16, 2019

    Keywords: Americas, US, Banking, Accounting, Credit Risk, CECL, IFRS 9, Credit Losses Standard, Leases Standard, IFRS 16, Credit Ratings, US Agencies

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