UPDATED: Agencies propose joint policy statement in response to CECL, with updates to ALLL ‘concepts and practices’

A proposed interagency policy statement in response to the impending, new “current expected credit losses” (CECL) accounting standard and addressing allowance for credit losses (ACLs) at financial institutions was issued by the federal banking agencies and the federal credit union regulator Thursday, based filings published Thursday.

In the proposal on ACLs published in the Federal Register Thursday, the agencies describe the CECL methodology for determining ACLs at the institutions they supervise that are applicable to financial assets measured at amortized cost, including loans held-for-investment, net investments in leases, held-to-maturity (HTM) debt securities, and certain off-balance-sheet credit exposures.

The proposal was issued by the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).

The proposed policy statement also includes and updates “concepts and practices” detailed in existing allowance for loan and lease losses (ALLLs) at their institutions that, the statement says, remain relevant under the new accounting standard.

“These concepts and practices relate to management’s responsibilities for the allowance estimation process, including the need to appropriately support and document the institution’s allowance estimates; the board of directors’ responsibilities for overseeing management’s processes; and the role of examiners in reviewing the appropriateness of an institution’s ACLs as part of their supervisory activities,” the proposal states.

The agencies want comment (due 60 days after the proposal’s publication) on four areas of the proposed policy statement:

  • Does it clearly describe measurement of expected credit losses under the new CECL standard?
  • Is it clear about the measurement of credit losses on impaired available for sale (AFS) debt securities under the new standard?
  • Does it clearly communicate supervisory expectations for “for designing, documenting, and validating expected credit loss estimation processes, internal controls over ACLs, and maintaining appropriate ACLs?”
  • Does it “appropriately” include concepts and practices detailed in existing ALLL policy statements that are relevant under the new accounting standard?

The agencies also noted that the policy guidance will only take effect for financial institutions after the effective date of the accounting standard for individual institutions (which varies by the types and activities scope of the banks, thrifts or credit unions).

Interagency Policy Statement on Allowances for Credit Losses