As banks prepare to implement the current expected credit loss accounting standard, the financial regulatory agencies have issued a proposed interagency policy statement on allowances for credit losses and proposed interagency guidance on credit risk review systems.
The policy statement describes the CECL methodology for determining allowances for credit losses applicable to financial assets measured at amortized costs, including loans held-for-investment, net investments in leases, held-to-maturity debt securities and certain off-balance-sheet credit exposures. Once finalized, it would be effective at the time of each institution’s adoption of CECL.
The proposed credit risk review guidance would update the 2006 interagency policy statement on the allowance for loan and lease losses to reflect the CECL methodology. It reaffirms the key elements of an effective credit risk review system, including qualifications and independence of credit risk review personnel, among other things. It also reiterates the importance of ensuring that employees that are involved with assessing credit risk are independent from the lending function.