Agencies seek comments on proposed changes to CECL
On October 17, the OCC, Federal Reserve Board, FDIC, and NCUA published a proposed interagency policy statement on allowances for credit losses and proposed interagency guidance on credit risk review systems.
The proposed policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) methodology for determining allowances for credit losses applicable to financial assets measured at amortized costs. It will apply to financial assets measured at amortized cost, loans held-for-investment, net investments in leases, held-to-maturity debt securities, and certain off-balance-sheet credit exposures. The proposed policy statement also stipulates financial assets for which the CECL methodology is not applicable, and includes supervisory expectations for designing, documenting, and validating expected credit loss estimation processes. Once finalized, the proposed policy would be effective at the time of each institution’s adoption of CECL.
The proposed credit risk review systems guidance—which is relevant to all institutions supervised by the agencies—will update the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses to reflect the CECL methodology. The proposed 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.” Furthermore, the proposed guidance stresses that financial institution employees involved with assessing credit risk should be independent from an institution’s lending function.
Comments on both proposals are due December 16.