On October 17, 2019, the Federal Financial Institutions Examination Council (FFIEC) issued the much-anticipated proposed draft Interagency Policy Statement on Allowance for Credit Losses (ACLs).
The agencies issued the draft in response to changes in the accounting for credit losses under the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 326 (most commonly known as CECL).
As it stands, the proposed interagency statement would be effective at the time of each institution’s formal adoption of CECL. It would supersede the agencies’ December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, the July 2001 Policy Statement on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Banks and Savings Institutions, and the National Credit Union Administration’s (NCUA) May 2002 Interpretive Ruling and Policy Statement 02-3: Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions (collectively, the ALLL policy statements).
Rather than updating the agencies’ guidance on loan review systems as part of the proposed interagency policy statement on ACLs, the agencies are currently developing separate standalone guidance on supervisory expectations for effective credit risk review.
The agencies are requesting commentary on all aspects of the proposed interagency statement, including the following:
- Does the proposed interagency policy statement clearly describe the measurement of expected credit losses under CECL?
- Does the proposed interagency policy statement clearly describe the measurement of credit losses on impaired Available for Sale (AFS) debt securities?
- Does the proposed interagency policy statement clearly communicate supervisory expectations for designing, documenting, and validating expected credit loss estimation processes, internal controls over ACLs, and maintaining appropriate ACLs?
- Has the proposed interagency policy statement appropriately included concepts and practices detailed in the existing ALLL policy statements that are also relevant under CECL?
The agencies are requesting comments by December 16, 2019.
Our financial institutions professionals are currently analyzing the proposed guidance and anticipating the effects of these changes. If you are unsure what these policy changes may mean for you and your organization, contact one of our CRI professionals who can provide you with the proper guidance.