ABA: Agencies’ Proposed Credit Risk Review Guidance Is Overly Prescriptive

Regulators’ proposed changes to interagency guidance on credit risk review systems are “either too broad or overly prescriptive,” and could impose a significant cost burden on smaller institutions, the American Bankers Association warned in a comment letter today. The agencies earlier this year proposed to issue standalone guidance on credit risk review systems as part of their effort to update the 2006 interagency policy statement on the allowance for loan and lease losses to reflect the current expected credit loss standard.

The proposed guidance 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. However, ABA raised concerns about the agencies’ “one-size fits all” approach and recommended that they instead allow it to be tailored to individual banks according to their unique profiles and business models.

ABA also cautioned that incorporating the current expected credit loss standard into credit risk ratings could create an overly complex methodology that many banks may ultimately be unable to effectively implement.