District Circular Letters
August 2, 2001
BANKING SUPERVISION AND REGULATION:
ALLOWANCE FOR LOAN AND LEASE LOSSES
To State Member Banks,
Bank Holding Companies,
and Others Concerned,
in the Twelfth Federal Reserve District
Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation
(SR
01-17)
The Federal Financial Institutions Examination Council (FFIEC) has issued
the attached "Interagency Policy Statement on Allowance for Loan and Lease
Losses Methodologies and Documentation for Banks and Savings Institutions."
This guidance was developed in conjunction with the Securities and Exchange
Commission staff, who is issuing parallel guidance in the form of "Staff
Accounting Bulletin No. 102." In general, the interagency policy statement
clarifies expectations on documentation that supports the ALLL methodology.
Additionally, the statement emphasizes the need for appropriate ALLL policies
and procedures, which should include an effective loan review system.
The guidance also provides examples of appropriate supporting documentation
as well as illustrations on how to implement this guidance. The Federal
Reserve is adopting the FFIEC policy, effective immediately.
The guidance requires that a financial institution's ALLL methodology
be consistent with generally accepted accounting principals (GAAP) and
all outstanding supervisory guidance. An ALLL methodology should be systematic,
consistently applied, and auditable. The methodology should be validated
on a periodic basis and modified to incorporate new events or findings,
as needed. The guidance specifies that management, under the direction
of the board of directors, should implement appropriate procedures and
controls to ensure compliance with the institution's ALLL policies and
procedures. Institution management should segment the portfolio to evaluate
credit risks, select loss rates that best reflect the probable loss, and
be responsive to changes in the organization, the economy, or the lending
environment by changing the methodology. Supporting information should
be included on summary schedules, whenever feasible. Under this policy,
institutions with less complex loan products or portfolios, such as community
banks, may use a more streamlined approach to implement this guidance.
This policy statement is consistent with the Federal Reserve's longstanding
policy to promote strong internal controls over an institution's ALLL
process. It is intended to supplement, not replace, the guidance in the
"Interagency Policy Statement on the ALLL" issued in December 1993 (SR
letter 93-70), and it does not change GAAP. In this regard, this new policy
statement recognizes that determining an appropriate allowance involves
a high degree of management judgment and is inevitably imprecise. Accordingly,
an institution may determine that the amount of loss falls within a range.
In accordance with GAAP, an institution should record its best estimate
within the range of credit losses.
While this policy statement, by its terms, applies only to depository
institutions insured by the Federal Deposit Insurance Corporation, the
Federal Reserve believes the guidance it contains is broadly applicable
to bank holding companies. Accordingly, examiners should apply the policy,
as appropriate, in the inspection of bank and holding companies and their
nonbank subsidiaries. However, this policy does not apply to federally
insured branches and agencies of foreign banks. Federally insured branches
and agencies of foreign banks continue to be subject to separate guidance
issued by their primary supervisory agency.
Additional Information
All circulars and documents are available on the Internet through the
Federal Reserve Bank of San Francisco's Internet site, at http://www.frbsf.org/banking/letters.
Copies of the guidance are available from our Corporate Services
Department. To request copies to be sent by mail, please call (415)
974-2060.
For additional information about guidance for allowance for loan and
lease losses, please contact our Banking Supervision and Regulation Department
at (415) 974-2936.
FEDERAL RESERVE BANK OF SAN FRANCISCO
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