District Circular Letters
June 3, 1999
BANKING SUPERVISION AND REGULATION:
LOAN-LOSS ALLOWANCES
To State Member Banks, Bank
Holding Companies, Edge Act Corporations,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned
in the Twelfth Federal Reserve District
Guidance on Recent Developments Regarding Loan-Loss Allowances:
SR
99 - 13 (SUP)
The Federal Reserve Board has issued the enclosed guidance letter to supervisors
and bankers regarding a Financial Accounting Standards Board (FASB) staff
article on loan-loss allowances. The guidance includes emerging points of
agreement between the Securities and Exchange Commission and the Federal
Reserve on loan-loss accounting matters.
The Federal Reserve expects institutions to consider the FASB guidance in
maintaining conservative loan-loss allowances, consistent with generally
accepted accounting principles (GAAP). In this regard, banks may record
their loan-loss allowances at the high end of the range of estimated losses,
when doing so reflects management's best estimate. The guidance notes that
determining the appropriate allowance involves a high degree of management
judgment, and that allowances designated as unallocated are not inconsistent
with GAAP, provided they reflect an estimate of inherent credit losses determined
in accordance with GAAP.
The recent accounting developments discussed in the FASB article are expected
to have a limited impact on the level of the banking industry's loan-loss
allowances. As the federal banking agencies and Securities and Exchange
Commission noted in a March 10 joint letter, "We recognize that today, instability
in global markets, for example, is likely to increase loss inherent in affected
institutions' portfolios and consequently require higher allowances for
credit losses than were appropriate in more stable times."
Looking ahead, given the fundamental changes that have taken place in credit-risk
management in recent years, a broader re-examination of accounting standards
for loan loss allowances would appear beneficial. The Federal Reserve intends
to play an active role in promoting and participating in such an effort,
to ensure that allowance levels remain conservative and prudent, consistent
with safety and soundness considerations.
For Additional Information
For additional information regarding loan loss allowances, please contact
our Banking Supervision and Regulation Department, at (415) 974-2998.
FEDERAL RESERVE BANK OF SAN FRANCISCO
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