Agencies Issue Policy Statement on Allowances for Credit Losses

The financial regulatory agencies today issued a final interagency policy statement on determining allowances for credit losses under the current expected credit loss methodology. The statement—which takes effect at the time of each institution’s adoption of CECL—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.

The agencies also finalized guidance on credit risk review systems to reflect the new CECL standard. The guidance reaffirms the 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 involved with assessing credit risk are independent from the lending function.