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.