On October 17, 2019, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration released for public comment a proposed interagency policy statement on allowances for credit losses (“ACLs”).  The proposed policy statement reflects the Financial Accounting Standards Board’s adoption of the current expected credit losses (“CECL”) methodology.

The proposed policy statement would recognize that “estimating appropriate ACLs involves a high degree of management judgment and is inherently imprecise.  An institution’s process for determining appropriate ACLs may result in a range of estimates for expected credit losses.”  At the same time, however, the statement would appear to grant examiners significant discretion to separately assess banking organizations’ ACL judgments and reach their own independent conclusions.  Examiners would be directed to “review the appropriateness and reasonableness of the overall level of ACLs,” and to record in the report of examination any conclusions that a banking organization’s reported ACLs are not appropriate or that its ACL evaluation processes are deficient.

Additionally, the statement would impose a range of prescriptive requirements relating to the processes that a banking organization uses to determine its ACLs.  For example, the proposed statement includes lengthy and detailed lists of (i) documentation requirements, (ii) topics that an organization’s ACL policies and procedures must address, (iii) responsibilities of management, and (iv) oversight activities of the board of directors that will be “subject to review by examiners.”

The concepts and practices in the proposed policy statement are similar, but not identical, to those articulated in several existing policy statements related to the allowance for loan and lease losses that predate the development of the CECL methodology, including the December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, and the July 2001 Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions.  The proposed policy statement notes that these existing policy statements would cease to be effective once a banking organization adopts CECL – that is, it would supersede them once CECL is in effect.

Comments on the proposed interagency policy statement are due December 16, 2019.

Photo of Jeremy Newell Jeremy Newell

Jeremy Newell represents a wide range of U.S. and foreign banks and other financial institutions on regulatory and public policy matters. He advises on all aspects of the regulatory framework for foreign and domestic financial institutions, including control of supervised banks, structuring of…

Jeremy Newell represents a wide range of U.S. and foreign banks and other financial institutions on regulatory and public policy matters. He advises on all aspects of the regulatory framework for foreign and domestic financial institutions, including control of supervised banks, structuring of new products and investments, regulatory compliance matters, and mergers, acquisitions, and other strategic transactions. His practice also focuses on assisting financial institutions on compliance with international capital and liquidity standards and other strategic regulatory policy matters.

Prior to joining Covington, Mr. Newell served as Executive Vice President, General Counsel & Chief Operating Officer at the Bank Policy Institute (BPI), and held similar roles at its predecessor organization, The Clearing House Association (TCH), where he oversaw regulatory affairs, strategy, and advocacy. He also previously served as counsel in the Legal Division and then regulatory policy advisor in the Banking Supervision & Regulation Division to the Board of Governors of the Federal Reserve System, where he developed and implemented financial regulatory policy with a focus on issues affecting large complex financial institutions, including implementation of significant aspects of the Dodd-Frank Act and Basel III, negotiation of international standards for large banks, and other prudential regulatory policy issues. He also advised clients in private practice and as in-house counsel to two prominent financial institutions, one based in the United States and one based in the European Union, and is a frequent speaker, writer, and teacher on U.S. bank regulation and international regulatory policy for financial institutions.