Banking Agencies Issue Final Guidance on Credit Risk Review

The Federal Reserve Board ("FRB"), the FDIC, the National Credit Union Administration ("NCUA") and the OCC (collectively, the "Agencies") issued final guidance and a related policy statement on financial institutions' credit risk review.

According to the Agencies, the final guidance aligns with the "Interagency Guidelines Establishing Standards for Safety and Soundness," which emphasize the importance of financial institutions establishing (i) a credit risk review system, (ii) safety and soundness standards relating to the credit risk review process and (iii) communication procedures with management and boards of directors. In the final guidance, the Agencies highlighted several aspects of credit risk review systems for financial institutions to consider, including:

• a financial institution's "size, complexity, loan types, risk profile, and risk management practices";

• which responsibilities are assigned to certain organizational units (e.g., credit underwriting, loan administration or a loan group); and

• whether any credit risk review system functions will be carried out by a third party.

In response to recent U.S. generally accepted accounting principles ("GAAP") updates, the Agencies also provided a statement to encourage consistent interpretation and application of the principles. Specifically, the Agencies outline (i) the measurement of expected credit losses in accordance with GAAP, (ii) details concerning the estimation processes for expected credit losses (e.g., the internal controls of such processes), (iii) how to maintain appropriate allowances for credit losses ("ACLs"), (iv) examiner review of ACLs and (v) the duties of boards of directors and management.

Both the policy statement and final guidance became effective upon their publication in the Federal Register on May 8, 2020.