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U.S. Banking Regulators Provide Clarity on ACLs and Credit Risk Review Systems

The OCC, Federal Reserve Board, FDIC and National Credit Union Administration (the "agencies") proposed (i) a policy statement on allowances for credit losses ("ACLs") and (ii) guidance on credit risk review systems. Comments on both proposals must be submitted by December 16, 2019.

The proposed ACLs policy statement is designed, according to the agencies, to reflect updates made by the U.S. generally accepted accounting principles. The updates were codified in the FASB ASC Topic 326 ("Financial Instruments - Credit Losses"). Specifically, the statement would provide guidance on:

  • measuring the expected credit losses under the current expected credit losses ("CECL") methodology and the accounting for impairment on available-for-sale debt securities, as per FASB ASC Topic 326;
  • creating, documenting and verifying expected credit loss estimation processes;
  • maintaining appropriate ACLs; and
  • performing the responsibilities expected of boards of directors and management.

Additionally, the statement would provide information on the examiner reviews of ACLs.

The proposed Credit Risk Review Systems guidance would, according to the agencies, update existing guidance by outlining the principles for developing and maintaining a credit risk review system. Specifically, the guidance aims to clarify (i) how to create a "system of independent, ongoing credit review" and (ii) "appropriate communication" between an institution's management and board of directors about the performance of its loan portfolio.

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