Board
of
Governors
of
the
Federal
Reserve
System
Federal
Deposit
Insurance
Corporation
National
Credit
Union
Administration
Office
of
the
Comptroller
of
the
Currency
Page
1
of
21
Interagency
Policy
Statement
on
Allowances
for
Credit
Losses
(Revised
April
2023)
Purpose
The
Office
of
the
Comptroller
of
the
Currency
(OCC),
the
Board
of
Governors
of
the
Federal
Reserve
System
(FRB),
the
Federal
Deposit
Insurance
Corporation
(FDIC),
and
the
National
Credit
Union
Administration
(NCUA)
(collectively,
the
agencies)
are
issuing
this
Interagency
Policy
Statement
on
Allowances
for
Credit
Losses
(hereafter,
the
policy
statement)
to
promote
consistency
in
the
interpretation
and
application
of
Financial
Accounting
Standards
Board
(FASB)
Accounting
Standards
Update
2016-13,
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement
of
Credit
Losses
on
Financial
Instruments,
as
well
as
the
amendments
issued
since
June
2016.
[Footnote
1
-
The
FASB
issued
Accounting
Standards
Update
(ASU)
2016-13
on
June
16,
2016.
The
following
updates
were
published
after
the
issuance
of
ASU
2016-13:
ASU
2018-19
-
Codification
Improvements
to
Topic
326,
Financial
Instruments
—
Credit
Losses;
ASU
2019-04
-
Codification
Improvements
to
Topic
326,
Financial
Instruments
—
Credit
Losses,
Topic
815,
Derivatives
and
Hedging,
and
Topic
825,
Financial
Instruments;
ASU
2019-05
-
Financial
Instruments
-
Credit
Losses
(Topic
326):
Targeted
Transition
Relief;
ASU
2019-10
-
Financial
Instruments
—
Credit
Losses
(Topic
326),
Derivatives
and
Hedging
(Topic
815),
and
Leases
(Topic
842):
Effective
Dates;
ASU
2019-11
-
Codification
Improvements
to
Topic
326,
Financial
Instruments
—
Credit
Losses;
and
ASU
2022-02
,
Financial
Instruments
-
Credit
Losses
(Topic
326):
Troubled
Debt
Restructurings
and
Vintage
Disclosures.
Additionally,
institutions
may
refer
to
FASB
Staff
Q&A-Topic
326,
No.
1
,
Whether
the
Weighted-
Average
Remaining
Maturity
Method
is
an
Acceptable
Method
to
Estimate
Expected
Credit
Losses,
and
FASB
Staff
Q&A-Topic
326,
No.
2
,
Developing
an
Estimate
of
Expected
Credit
Losses
on
Financial
Assets.
End of Footnote 1.]
These
updates
are
codified
in
Accounting
Standards
Codification
(ASC)
Topic
326,
Financial
Instruments
-
Credit
Losses
(FASB
ASC
Topic
326).
FASB
ASC
Topic
326
applies
to
all
banks,
savings
associations,
credit
unions,
and
financial
institution
holding
companies
(collectively,
institutions),
regardless
of
size,
that
file
regulatory
reports
for
which
the
reporting
requirements
conform
to
U.S.
generally
accepted
accounting
principles
(GAAP).
[Footnote
2
-
U.S.
branches
and
agencies
of
foreign
banking
organizations
may
choose
to,
but
are
not
required
to,
maintain
ACLs
on
a
branch
or
agency
level.
These
institutions
should
refer
to
the
instructions
for
the
FFIEC
002,
Report
of
Assets
and
Liabilities
of
U.
S.
Branches
and
Agencies
of
Foreign
Banks;
Supervision
and
Regulation
(SR)
Letter
95
4,
Allowance
for
Loan
and
Lease
Losses
for
U.
S.
Branches
and
Agencies
of
Foreign
Banking
Organizations;
and
SR
Letter
95-42,
Allowance
for
Loan
and
Lease
Losses
for
U.S.
Branches
and
Agencies
of
Foreign
Banking
Organizations
.
End of Footnote 2.]
This
policy
statement
describes
the
measurement
of
expected
credit
losses
in
accordance
with
FASB
ASC
Topic
326;
the
design,
documentation,
and
validation
of
expected
credit
loss
estimation
processes,
including
the
internal
controls
over
these
processes;
the
maintenance
of
appropriate
allowances
for
credit
losses
(ACLs);
the
responsibilities
of
boards
of
directors
and
management;
and
examiner
reviews
of
ACLs.
Page
2
of
21
This
policy
statement
is
effective
at
the
time
of
each
institution's
adoption
of
FASB
ASC
Topic
326.
[Footnote
3
-
As
noted
in
Accounting
Standards
Update
2019-10,
FASB
ASC
Topic
326
is
effective
for
fiscal
years
beginning
after
December
15,
2019,
including
interim
periods
within
those
fiscal
years,
for
public
business
entities
that
meet
the
definition
of
a
Securities
Exchange
Commission
(SEC)
filer,
excluding
entities
eligible
to
be
small
reporting
companies
as
defined
by
the
SEC.
FASB
ASC
Topic
326
is
effective
for
all
other
entities
for
fiscal
years
beginning
after
December
15,
2022,
including
interim
periods
within
those
fiscal
years.
For
all
entities,
early
application
of
FASB
ASC
Topic
326
is
permitted
as
set
forth
in
ASU
2016-13.
End of Footnote 3.]
The
following
policy
statements
are
no
longer
effective
for
an
institution
upon
its
adoption
of
FASB
ASC
Topic
326:
the
December
2006
Interagency
Policy
Statement
on
the
Allowance
for
Loan
and
Lease
Losses;
the
July
2001
Policy
Statement
on
Allowance
for
Loan
and
Lease
Losses
Methodologies
and
Documentation
for
Banks
and
Savings
Institutions;
and
the
NCUA's
May
2002
Interpretive
Ruling
and
Policy
Statement
02-3,
Allowance
for
Loan
and
Lease
Losses
Methodologies
and
Documentation
for
Federally
Insured
Credit
Unions
(collectively,
ALLL
Policy
Statements).
After
FASB
ASC
Topic
326
is
effective
for
all
institutions,
the
agencies
will
rescind
the
ALLL
Policy
Statements.
The
principles
described
in
this
policy
statement
are
consistent
with
GAAP,
applicable
regulatory
reporting
requirements,
[Footnote
4
-
For
FDIC-insured
depository
institutions,
section
37(a)
of
the
Federal
Deposit
Insurance
Act
(12
U.SC.
1831n(a))
states
that,
in
general,
the
accounting
principles
applicable
to
the
Consolidated
Reports
of
Condition
and
Income
(Call
Report)
“
shall
be
uniform
and
consistent
with
generally
accepted
accounting
principles.
”
Section
202(a)(6)(C)
of
the
Federal
Credit
Union
Act
(12
U.S.C.
1782(a)(6)(C))
establishes
the
same
standard
for
federally
insured
credit
unions
with
assets
of
$10
million
or
greater,
providing
that,
in
general,
the
“
[a]ccounting
principles
applicable
to
reports
or
statements
required
to
be
filed
with
the
[NCUA]
Board
by
each
insured
credit
union
shall
be
uniform
and
consistent
with
generally
accepted
accounting
principles.
”
Furthermore,
regardless
of
asset
size,
all
federally
insured
credit
unions
must
comply
with
GAAP
for
certain
financial
reporting
requirements
relating
to
charges
for
loan
losses.
See
12
CFR
702.113(d). End of Footnote 4.]
safe
and
sound
banking
practices,
and
the
agencies'
codified
guidelines
establishing
standards
for
safety
and
soundness.
[Footnote
5
-
FDIC-insured
depository
institutions
should
refer
to
the
Interagency
Guidelines
Establishing
Standards
for
Safety
and
Soundness
adopted
by
their
primary
federal
regulator
pursuant
to
section
39
of
the
Federal
Deposit
Insurance
Act
(12
U.S.C.
1831p-1)
as
follows:
For
national
banks
and
federal
savings
associations,
Appendix
A
to
12
CFR
part
30;
for
state
member
banks,
Appendix
D
to
12
CFR
part
208;
and
for
state
nonmember
banks,
state
savings
associations,
and
insured
state-licensed
branches
of
foreign
banks,
Appendix
A
to
12
CFR
part
364.
Federally
insured
credit
unions
should
refer
to
section
206(b)(1)
of
the
Federal
Credit
Union
Act
(12
U.S.C.
1786)
and
12
CFR
741.3.
End of Footnote 5.]
The
operational
and
managerial
standards
included
in
those
guidelines,
which
address
such
matters
as
internal
controls
and
information
systems,
an
internal
audit
system,
loan
documentation,
credit
underwriting,
asset
quality,
and
earnings,
should
be
appropriate
for
an
institution's
size
and
the
nature,
scope,
and
risk
of
its
activities.
Scope
This
policy
statement
describes
the
current
expected
credit
losses
(CECL)
methodology
for
determining
the
ACLs
applicable
to
loans
held-for-investment,
net
investments
in
leases,
and
held-to-maturity
debt
securities
accounted
for
at
amortized
cost.
6
-
FASB
ASC
Topic
326
defines
the
amortized
cost
basis
as
the
amount
at
which
a
financing
receivable
or
investment
is
originated
or
acquired,
adjusted
for
applicable
accrued
interest,
accretion,
or
amortization
of
premium,
discount,
and
net
deferred
fees
or
costs,
collection
of
cash,
write-offs,
foreign
exchange,
and
fair
value
hedge
accounting
adjustments.
End of Footnote 6.]
It
also
describes
the
estimation
Page
3
of
21
of
the
ACL
for
an
available-for-sale
debt
security
in
accordance
with
FASB
ASC
Subtopic
326
30.
This
policy
statement
does
not
address
or
supersede
existing
agency
requirements
or
guidance
regarding
appropriate
due
diligence
in
connection
with
the
purchase
or
sale
of
assets
or
determining
whether
assets
are
permissible
to
be
purchased
or
held
by
institutions.
[Footnote
7
-
See
the
final
guidance
attached
to
OCC
Bulletin
2012-18,
Guidance
on
Due
Diligence
Requirements
in
Determining
Whether
Securities
Are
Eligible
for
Investment
(for
national
banks
and
federal
savings
associations),
12
CFR
part
1,
Investment
Securities
(for
national
banks),
and
12
CFR
part
160,
Lending
and
Investment
(for
federal
savings
associations).
Federal
credit
unions
should
refer
to
12
CFR
part
703,
Investment
and
Deposit
Activities
.
Federally
insured,
state-chartered
credit
unions
should
refer
to
applicable
state
laws
and
regulations,
as
well
as
12
CFR
741.219
(
“
investment
requirements
”
).
End of Footnote 7.]
The
CECL
methodology
described
in
FASB
ASC
Topic
326
applies
to
financial
assets
measured
at
amortized
cost,
net
investments
in
leases,
and
off-balance-sheet
credit
exposures
(collectively,
financial
assets)
including:
•
Financing
receivables
such
as
loans
held-for-investment;
•
Overdrawn
deposit
accounts
(i.e.
overdrafts)
that
are
reclassified
as
held-for-investment
loans;
•
Held-to-maturity
debt
securities;
•
Receivables
that
result
from
revenue
transactions
within
the
scope
of
Topic
606
on
revenue
from
contracts
with
customers
and
Topic
610
on
other
income,
which
applies,
for
example,
to
the
sale
of
foreclosed
real
estate;
•
Reinsurance
recoverables
that
result
from
insurance
transactions
within
the
scope
of
Topic
944
on
insurance;
•
Receivables
related
to
repurchase
agreements
and
securities
lending
agreements
within
the
scope
of
Topic
860
on
transfers
and
servicing;
•
Net
investments
in
leases
recognized
by
a
lessor
in
accordance
with
Topic
842
on
leases;
and
•
Off-balance-sheet
credit
exposures
including
off-balance-sheet
loan
commitments,
standby
letters
of
credit,
financial
guarantees
not
accounted
for
as
insurance,
and
other
similar
instruments
except
for
those
within
the
scope
of
Topic
815
on
derivatives
and
hedging.
The
CECL
methodology
does
not
apply
to
the
following
financial
assets:
•
Financial
assets
measured
at
fair
value
through
net
income,
including
those
assets
for
which
the
fair
value
option
has
been
elected;
•
Available-for-sale
debt
securities;
[Footnote
8
-
Refer
to
FASB
ASC
Subtopic
326-30,
Financial
Instruments
-
Credit
Losses
-
Available-for-Sale
Debt
Securities
(FASB
ASC
Subtopic
326-30).
End of Footnote 8.]
•
Loans
held-for-sale;
•
Policy
loan
receivables
of
an
insurance
entity;
Page
4
of
21
•
Loans
and
receivables
between
entities
under
common
control;
and
•
Receivables
arising
from
operating
leases.
Measurement
of
ACLs
for
Loans,
Leases,
Held-to-Maturity
Debt
Securities,
and
Off-
Balance-Sheet
Credit
Exposures
Overview
of
ACLs
An
ACL
is
a
valuation
account
that
is
deducted
from,
or
added
to,
the
amortized
cost
basis
of
financial
assets
to
present
the
net
amount
expected
to
be
collected
over
the
contractual
term
[Footnote
9
-
Consistent
with
FASB
ASC
Topic
326,
an
institution's
determination
of
the
contractual
term
should
reflect
the
financial
asset's
contractual
life
adjusted
for
prepayments
and
renewal
and
extension
options
that
are
not
unconditionally
cancellable
by
the
institution.
For
more
information,
see
the
“
Contractual
Term
of
a
Financial
Asset
”
section
in
this
policy
statement.
End of Footnote 9 .]
of
the
assets.
In
estimating
the
net
amount
expected
to
be
collected,
management
should
consider
the
effects
of
past
events,
current
conditions,
and
reasonable
and
supportable
forecasts
on
the
collectibility
of
the
institution's
financial
assets.
[Footnote
10
-
Recoveries
are
a
component
of
management's
estimation
of
the
net
amount
expected
to
be
collected
for
a
financial
asset.
Expected
recoveries
of
amounts
previously
written
off
or
expected
to
be
written
off
that
are
included
in
ACLs
may
not
exceed
the
aggregate
amounts
previously
written
off
or
expected
to
be
written
off.
In
some
circumstances,
the
ACL
for
a
specific
portfolio
or
loan
may
be
negative
because
the
amount
expected
to
be
collected,
including
expected
recoveries,
exceeds
the
financial
asset's
amortized
cost
basis.
End of Footnote 10.]
FASB
ASC
Topic
326
requires
management
to
use
relevant
forward-looking
information
and
expectations
drawn
from
reasonable
and
supportable
forecasts
when
estimating
expected
credit
losses.
ACLs
are
evaluated
as
of
the
end
of
each
reporting
period.
The
methods
used
to
determine
ACLs
generally
should
be
applied
consistently
over
time
and
reflect
management's
current
expectations
of
credit
losses.
Changes
to
ACLs
resulting
from
these
periodic
evaluations
are
recorded
through
increases
or
decreases
to
the
related
provisions
for
credit
losses
(PCLs).
When
available
information
confirms
that
specific
loans,
securities,
other
assets,
or
portions
thereof,
are
uncollectible,
these
amounts
should
be
promptly
written
off
[Footnote
11
-
Consistent
with
FASB
ASC
Topic
326,
this
policy
statement
uses
the
verbs
“
write
off
”
and
“
written
off
”
and
the
noun
“
write-off.
”
These
terms
are
used
interchangeably
with
“
charge
off,
”
“
charged
off,
”
and
“
charge-off,
”
respectively,
in
the
agencies'
regulations,
guidance,
and
regulatory
reporting
instructions.
End of Footnote 11.]
against
the
related
ACLs.
Estimating
appropriate
ACLs
involves
a
high
degree
of
management
judgment
and
is
inherently
imprecise.
An
institution's
process
for
determining
appropriate
ACLs
may
result
in
a
range
of
estimates
for
expected
credit
losses.
An
institution
should
support
and
record
its
best
estimate
within
the
range
of
expected
credit
losses.
Collective
Evaluation
of
Expected
Losses
FASB
ASC
Topic
326
requires
expected
losses
to
be
evaluated
on
a
collective,
or
pool,
basis
when
financial
assets
share
similar
risk
characteristics.
Financial
assets
may
be
segmented
based
on
one
characteristic,
or
a
combination
of
characteristics.
Examples
of
risk
characteristics
relevant
to
this
evaluation
include,
but
are
not
limited
to:
Page
5
of
21
•
Internal
or
external
credit
scores
or
credit
ratings;
•
Risk
ratings
or
classifications;
•
Financial
asset
type;
•
Collateral
type;
•
Size;
•
Effective
interest
rate;
•
Term;
•
Geographical
location;
•
Industry
of
the
borrower;
and
•
Vintage.
Other
risk
characteristics
that
may
be
relevant
for
segmenting
held-to-maturity
debt
securities
include
issuer,
maturity,
coupon
rate,
yield,
payment
frequency,
source
of
repayment,
bond
payment
structure,
and
embedded
options.
FASB
ASC
Topic
326
does
not
prescribe
a
process
for
segmenting
financial
assets
for
collective
evaluation.
Therefore,
management
should
exercise
judgment
when
establishing
appropriate
segments
or
pools.
Management
should
evaluate
financial
asset
segmentation
on
an
ongoing
basis
to
determine
whether
the
financial
assets
in
the
pool
continue
to
share
similar
risk
characteristics.
If
a
financial
asset
ceases
to
share
risk
characteristics
with
other
assets
in
its
segment,
it
should
be
moved
to
a
different
segment
with
assets
sharing
similar
risk
characteristics
if
such
a
segment
exists.
If
a
financial
asset
does
not
share
similar
risk
characteristics
with
other
assets,
expected
credit
losses
for
that
asset
should
be
evaluated
individually.
Individually
evaluated
assets
should
not
be
included
in
a
collective
assessment
of
expected
credit
losses.
Estimation
Methods
for
Expected
Credit
Losses
FASB
ASC
Topic
326
does
not
require
the
use
of
a
specific
loss
estimation
method
for
purposes
of
determining
ACLs.
Various
methods
may
be
used
to
estimate
the
expected
collectibility
of
financial
assets,
with
those
methods
generally
applied
consistently
over
time.
The
same
loss
estimation
method
does
not
need
to
be
applied
to
all
financial
assets.
Management
is
not
precluded
from
selecting
a
different
method
when
it
determines
the
method
will
result
in
a
better
estimate
of
ACLs.
Management
may
use
a
loss-rate
method,
[Footnote
12
-
Various
loss-rate
methods
may
be
used
to
estimate
expected
credit
losses
under
the
CECL
methodology.
These
include
the
weighted-average
remaining
maturity
(WARM)
method,
vintage
analysis,
and
the
snapshot
or
open
pool
method.
End of Footnote 12.]
probability
of
default/loss
given
default
(PD/LGD)
method,
roll-rate
method,
discounted
cash
flow
method,
a
method
that
uses
aging
schedules,
or
another
reasonable
method
to
estimate
expected
credit
losses.
The
selected
Page
6
of
21
method(s)
should
be
appropriate
for
the
financial
assets
being
evaluated,
consistent
with
the
institution's
size
and
complexity.
Contractual
Term
of
a
Financial
Asset
FASB
ASC
Topic
326
requires
an
institution
to
measure
estimated
expected
credit
losses
over
the
contractual
term
of
its
financial
assets,
considering
expected
prepayments.
Renewals,
extensions,
and
modifications
are
excluded
from
the
contractual
term
of
a
financial
asset
for
purposes
of
estimating
the
ACL
unless
the
renewal
and
extension
options
are
part
of
the
original
or
modified
contract
and
are
not
unconditionally
cancellable
by
the
institution.
If
such
renewal
or
extension
options
are
present,
management
must
evaluate
the
likelihood
of
a
borrower
exercising
those
options
when
determining
the
contractual
term.
Historical
Loss
Information
Historical
loss
information
generally
provides
a
basis
for
an
institution's
assessment
of
expected
credit
losses.
Historical
loss
information
may
be
based
on
internal
information,
external
information,
or
a
combination
of
both.
Management
should
consider
whether
the
historical
loss
information
may
need
to
be
adjusted
for
differences
in
current
asset
specific
characteristics
such
as
differences
in
underwriting
standards,
portfolio
mix,
or
when
historical
asset
terms
do
not
reflect
the
contractual
terms
of
the
financial
assets
being
evaluated
as
of
the
reporting
date.
Management
should
then
consider
whether
further
adjustments
to
historical
loss
information
are
needed
to
reflect
the
extent
to
which
current
conditions
and
reasonable
and
supportable
forecasts
differ
from
the
conditions
that
existed
during
the
historical
loss
period.
Adjustments
to
historical
loss
information
may
be
quantitative
or
qualitative
in
nature
and
should
reflect
changes
to
relevant
data
(such
as
changes
in
unemployment
rates,
delinquency,
or
other
factors
associated
with
the
financial
assets).
Reasonable
and
Supportable
Forecasts
When
estimating
expected
credit
losses,
FASB
ASC
Topic
326
requires
management
to
consider
forward-looking
information
that
is
both
reasonable
and
supportable
and
relevant
to
assessing
the
collectibility
of
cash
flows.
Reasonable
and
supportable
forecasts
may
extend
over
the
entire
contractual
term
of
a
financial
asset
or
a
period
shorter
than
the
contractual
term.
FASB
ASC
Topic
326
does
not
prescribe
a
specific
method
for
determining
reasonable
and
supportable
forecasts
nor
does
it
include
bright
lines
for
establishing
a
minimum
or
maximum
length
of
time
for
reasonable
and
supportable
forecast
period(s).
Judgment
is
necessary
in
determining
an
appropriate
period(s)
for
each
institution.
Reasonable
and
supportable
forecasts
may
vary
by
portfolio
segment
or
individual
forecast
input.
These
forecasts
may
include
data
from
internal
sources,
external
sources,
or
a
combination
of
both.
Management
is
not
required
to
search
for
all
possible
information
nor
incur
undue
cost
and
effort
to
collect
data
for
its
forecasts.
However,
reasonably
available
and
relevant
information
should
not
be
ignored
in
assessing
the
collectibility
of
cash
flows.
Management
should
evaluate
the
appropriateness
of
the
reasonable
and
supportable
forecast
period(s)
each
reporting
period,
consistent
with
other
inputs
used
in
the
estimation
of
expected
credit
losses.
Page
7
of
21
Institutions
may
develop
reasonable
and
supportable
forecasts
by
using
one
or
more
economic
scenarios.
FASB
ASC
Topic
326
does
not
require
the
use
of
multiple
economic
scenarios;
however,
institutions
are
not
precluded
from
considering
multiple
economic
scenarios
when
estimating
expected
credit
losses.
Reversion
When
the
contractual
term
of
a
financial
asset
extends
beyond
the
reasonable
and
supportable
period,
FASB
ASC
Topic
326
requires
reverting
to
historical
loss
information,
or
an
appropriate
proxy,
for
those
periods
beyond
the
reasonable
and
supportable
forecast
period
(often
referred
to
as
the
reversion
period).
Management
may
revert
to
historical
loss
information
for
each
individual
forecast
input
or
based
on
the
entire
estimate
of
loss.
FASB
ASC
Topic
326
does
not
require
the
application
of
a
specific
reversion
technique
or
use
of
a
specific
reversion
period.
Reversion
to
historical
loss
information
may
be
immediate,
occur
on
a
straight-line
basis,
or
use
any
systematic,
rational
method.
Management
may
apply
different
reversion
techniques
depending
on
the
economic
environment
or
the
financial
asset
portfolio.
Reversion
techniques
are
not
accounting
policy
elections
and
should
be
evaluated
for
appropriateness
each
reporting
period,
consistent
with
other
inputs
used
in
the
estimation
of
expected
credit
losses.
FASB
ASC
Topic
326
does
not
specify
the
historical
loss
information
that
is
used
in
the
reversion
period.
This
historical
loss
information
may
be
based
on
long-term
average
losses
or
on
losses
that
occurred
during
a
particular
historical
period(s).
Management
may
use
multiple
historical
periods
that
are
not
sequential.
Management
should
not
adjust
historical
loss
information
for
existing
economic
conditions
or
expectations
of
future
economic
conditions
for
periods
beyond
the
reasonable
and
supportable
period.
However,
management
should
consider
whether
the
historical
loss
information
may
need
to
be
adjusted
for
differences
in
current
asset
specific
characteristics
such
as
differences
in
underwriting
standards,
portfolio
mix,
or
when
historical
asset
terms
do
not
reflect
the
contractual
terms
of
the
financial
assets
being
evaluated
as
of
the
reporting
date.
Qualitative
Factor
Adjustments
The
estimation
of
ACLs
should
reflect
consideration
of
all
significant
factors
relevant
to
the
expected
collectibility
of
the
institution's
financial
assets
as
of
the
reporting
date.
Management
may
begin
the
expected
credit
loss
estimation
process
by
determining
its
historical
loss
information
or
obtaining
reliable
and
relevant
historical
loss
proxy
data
for
each
segment
of
financial
assets
with
similar
risk
characteristics.
Historical
credit
losses
(or
even
recent
trends
in
losses)
generally
do
not,
by
themselves,
form
a
sufficient
basis
to
determine
the
appropriate
levels
for
ACLs.
Management
should
consider
the
need
to
qualitatively
adjust
expected
credit
loss
estimates
for
information
not
already
captured
in
the
loss
estimation
process.
These
qualitative
factor
adjustments
may
increase
or
decrease
management's
estimate
of
expected
credit
losses.
Adjustments
should
not
be
made
for
information
that
has
already
been
considered
and
included
in
the
loss
estimation
process.
Page
8
of
21
Management
should
consider
the
qualitative
factors
that
are
relevant
to
the
institution
as
of
the
reporting
date,
which
may
include,
but
are
not
limited
to:
•
The
nature
and
volume
of
the
institution's
financial
assets;
•
The
existence,
growth,
and
effect
of
any
concentrations
of
credit;
•
The
volume
and
severity
of
past
due
financial
assets,
the
volume
of
nonaccrual
assets,
and
the
volume
and
severity
of
adversely
classified
or
graded
assets;
[Footnote
13
-
For
banks
and
savings
associations,
adversely
classified
or
graded
loans
are
loans
rated
“
substandard
”
(or
its
equivalent)
or
worse
under
the
institution's
loan
classification
system.
For
credit
unions,
adversely
graded
loans
are
loans
included
in
the
more
severely
graded
categories
under
the
institution's
credit
grading
system,
i.e.,
those
loans
that
tend
to
be
included
in
the
credit
union's
“
watch
lists.
”
Criteria
related
to
the
classification
of
an
investment
security
may
be
found
in
the
interagency
policy
statement
Uniform
Agreement
on
the
Classification
and
Appraisal
of
Securities
Held
by
Depository
Institutions
issued
by
the
FDIC,
Board,
and
OCC
in
October
2013.
End of Footnote 13.]
•
The
value
of
the
underlying
collateral
for
loans
that
are
not
collateral-dependent;
[Footnote
14
-
See
the
“
Collateral-Dependent
Financial
Assets
”
section
of
this
policy
statement
for
more
information
on
collateral-dependent
loans.
End of Footnote 14.]
•
The
institution's
lending
policies
and
procedures,
including
changes
in
underwriting
standards
and
practices
for
collections,
write-offs,
and
recoveries;
•
The
quality
of
the
institution's
credit
review
function;
•
The
experience,
ability,
and
depth
of
the
institution's
lending,
investment,
collection,
and
other
relevant
management
and
staff;
•
The
effect
of
other
external
factors
such
as
the
regulatory,
legal
and
technological
environments;
competition;
and
events
such
as
natural
disasters;
and
•
Actual
and
expected
changes
in
international,
national,
regional,
and
local
economic
and
business
conditions
and
developments
[Footnote
15
-
Changes
in
economic
and
business
conditions
and
developments
included
in
qualitative
factor
adjustments
are
limited
to
those
that
affect
the
collectibility
of
an
institution's
financial
assets
and
are
relevant
to
the
institution's
financial
asset
portfolios.
For
example,
an
economic
factor
for
current
or
forecasted
unemployment
at
the
national
or
state
level
may
indicate
a
strong
job
market
based
on
low
national
or
state
unemployment
rates,
but
a
local
unemployment
rate,
which
may
be
significantly
higher,
for
example,
because
of
the
actual
or
forecasted
loss
of
a
major
local
employer
may
be
more
relevant
to
the
collectibility
of
an
institution's
financial
assets.
End of Footnote 15.]
in
which
the
institution
operates
that
affect
the
collectibility
of
financial
assets.
Management
may
consider
the
following
additional
qualitative
factors
specific
to
held-to-
maturity
debt
securities
as
of
the
reporting
date:
[Footnote
16
-
This
list
is
not
all-inclusive,
and
all
of
the
factors
listed
may
not
be
relevant
to
all
institutions.
End of Footnote 16.]
•
The
effect
of
recent
changes
in
investment
strategies
and
policies;
•
The
existence
and
effect
of
loss
allocation
methods,
the
definition
of
default,
the
impact
of
performance
and
market
value
triggers,
and
credit
and
liquidity
enhancements
associated
with
debt
securities;
Page
9
of
21
•
The
effect
of
structural
subordination
and
collateral
deterioration
on
tranche
performance
of
debt
securities;
•
The
quality
of
underwriting
for
any
collateral
backing
debt
securities;
and
•
The
effect
of
legal
covenants
associated
with
debt
securities.
Changes
in
the
level
of
an
institution's
ACLs
may
not
always
be
directionally
consistent
with
changes
in
the
level
of
qualitative
factor
adjustments
due
to
the
incorporation
of
reasonable
and
supportable
forecasts
in
estimating
expected
losses.
For
example,
if
improving
credit
quality
trends
are
evident
throughout
an
institution's
portfolio
in
recent
years,
but
management's
evaluation
of
reasonable
and
supportable
forecasts
indicates
expected
deterioration
in
credit
quality
of
the
institution's
financial
assets
during
the
forecast
period,
the
ACL
as
a
percentage
of
the
portfolio
may
increase.
Collateral-Dependent
Financial
Assets
FASB
ASC
Topic
326
describes
a
collateral-dependent
asset
as
a
financial
asset
for
which
the
repayment
is
expected
to
be
provided
substantially
through
the
operation
or
sale
of
the
collateral
when
the
borrower,
based
on
management's
assessment,
is
experiencing
financial
difficulty
as
of
the
reporting
date.
For
regulatory
reporting
purposes,
the
ACL
for
a
collateral
dependent
loan
is
measured
using
the
fair
value
of
collateral,
regardless
of
whether
foreclosure
is
probable.
[Footnote
17
-
The
agencies,
at
times,
prescribe
specific
regulatory
reporting
requirements
that
fall
within
a
range
of
acceptable
practice
under
GAAP.
These
specific
reporting
requirements,
such
as
the
requirement
for
institutions
to
apply
the
practical
expedient
in
ASC
326-20-35-5
for
collateral-dependent
loans,
regardless
of
whether
foreclosure
is
probable,
have
been
adopted
to
achieve
safety
and
soundness
and
other
public
policy
objectives
and
to
ensure
comparability
among
institutions.
The
regulatory
reporting
requirement
to
apply
the
practical
expedient
for
collateral-dependent
financial
assets
is
consistent
with
the
agencies'
long-standing
practice
for
collateral-dependent
loans,
and
it
continues
to
be
limited
to
collateral-dependent
loans.
It
does
not
apply
to
other
financial
assets
such
as
held-to-maturity
debt
securities
that
are
collateral-dependent.
End of Footnote 17.]
When
estimating
the
ACL
for
a
collateral-dependent
loan,
FASB
ASC
Topic
326
requires
the
fair
value
of
collateral
to
be
adjusted
to
consider
estimated
costs
to
sell
if
repayment
or
satisfaction
of
the
loan
depends
on
the
sale
of
the
collateral.
ACL
adjustments
for
estimated
costs
to
sell
are
not
appropriate
when
the
repayment
of
a
collateral-dependent
loan
is
expected
from
the
operation
of
the
collateral.
The
fair
value
of
collateral
securing
a
collateral-dependent
loan
may
change
over
time.
If
the
fair
value
of
the
collateral
as
of
the
ACL
evaluation
date
has
decreased
since
the
previous
ACL
evaluation
date,
the
ACL
should
be
increased
to
reflect
the
additional
decrease
in
the
fair
value
of
the
collateral.
Likewise,
if
the
fair
value
of
the
collateral
has
increased
as
of
the
ACL
evaluation
date,
the
increase
in
the
fair
value
of
the
collateral
is
reflected
through
a
reduction
in
the
ACL.
Any
negative
ACL
that
results
is
capped
at
the
amount
previously
written
off.
Changes
in
the
fair
value
of
collateral
described
herein
should
be
supported
and
documented
through
recent
appraisals
or
evaluations.
[Footnote
18
-
For
more
information
on
regulatory
expectations
related
to
the
use
of
appraisals
and
evaluations,
see
the
Interagency
Appraisal
and
Evaluation
Guidelines
published
on
December
10,
2010.
Insured
depository
institutions
should
also
refer
to
the
interagency
regulations
on
appraisals
adopted
by
their
primary
federal
regulator
as
follows:
For
national
banks
and
federal
savings
associations,
Subpart
C
of
12
CFR
part
34;
for
state
member
banks,
12
CFR
parts
208
and
225;
for
state
nonmember
banks,
state
savings
associations,
and
insured
state-licensed
branches
of
foreign
banks,
12
CFR
part
323;
and
for
federally
insured
credit
unions,
12
CFR
part
722.
End of Footnote 18.]
Page
10
of
21
Purchased
Credit-Deteriorated
Assets
FASB
ASC
Topic
326
introduces
the
concept
of
purchased
credit-deteriorated
(PCD)
assets.
PCD
assets
are
acquired
financial
assets
that,
at
acquisition,
have
experienced
more-than-
insignificant
deterioration
in
credit
quality
since
origination.
FASB
ASC
Topic
326
does
not
provide
a
prescriptive
definition
of
more-than-insignificant
credit
deterioration.
The
acquiring
institution's
management
should
establish
and
document
a
reasonable
process
to
consistently
determine
what
constitutes
a
more-than-insignificant
deterioration
in
credit
quality.
When
recording
the
acquisition
of
PCD
assets,
the
amount
of
expected
credit
losses
as
of
the
acquisition
date
is
added
to
the
purchase
price
of
the
financial
assets
rather
than
recording
these
losses
through
PCLs.
This
establishes
the
amortized
cost
basis
of
the
PCD
assets.
Any
difference
between
the
unpaid
principal
balance
of
the
PCD
assets
and
the
amortized
cost
basis
of
the
assets
as
of
the
acquisition
date
is
the
non-credit
discount
or
premium.
The
initial
ACL
and
non-credit
discount
or
premium
determined
on
a
collective
basis
at
the
acquisition
date
are
allocated
to
the
individual
PCD
assets.
After
acquisition,
ACLs
for
PCD
assets
should
be
adjusted
at
each
reporting
date
with
a
corresponding
debit
or
credit
to
the
PCLs
to
reflect
management's
current
estimate
of
expected
credit
losses.
The
non-credit
discount
recorded
at
acquisition
will
be
accreted
into
interest
income
over
the
remaining
life
of
the
PCD
assets
on
a
level-yield
basis.
Financial
Assets
with
Collateral
Maintenance
Agreements
Institutions
may
have
financial
assets
that
are
secured
by
collateral
(such
as
debt
securities)
and
are
subject
to
collateral
maintenance
agreements
requiring
the
borrower
to
continuously
replenish
the
amount
of
collateral
securing
the
asset.
If
the
fair
value
of
the
collateral
declines,
the
borrower
is
required
to
provide
additional
collateral
as
specified
by
the
agreement.
FASB
ASC
Topic
326
includes
a
practical
expedient
for
financial
assets
with
collateral
maintenance
agreements
where
the
borrower
is
required
to
provide
collateral
greater
than
or
equal
to
the
amortized
cost
basis
of
the
asset
and
is
expected
to
continuously
replenish
the
collateral.
In
those
cases,
management
may
elect
the
collateral
maintenance
practical
expedient
and
measure
expected
credit
losses
for
these
qualifying
assets
based
on
the
fair
value
of
the
collateral.
[Footnote
19
-
For
example,
an
institution
enters
into
a
reverse
repurchase
agreement
with
a
collateral
maintenance
agreement.
Management
may
not
need
to
record
the
expected
credit
losses
at
each
reporting
date
as
long
as
the
fair
value
of
the
security
collateral
is
greater
than
the
amortized
cost
basis
of
the
reverse
repurchase
agreement.
Refer
to
ASC
326
20-55-46
for
more
information.
End of Footnote 19.]
If
the
fair
value
of
the
collateral
is
greater
than
the
amortized
cost
basis
of
the
financial
asset
and
management
expects
the
borrower
to
replenish
collateral
as
needed,
management
may
record
an
ACL
of
zero
for
the
financial
asset
when
the
collateral
maintenance
practical
expedient
is
applied.
Similarly,
if
the
fair
value
of
the
collateral
is
less
than
the
Page
11
of
21
amortized
cost
basis
of
the
financial
asset
and
management
expects
the
borrower
to
replenish
collateral
as
needed,
the
ACL
is
limited
to
the
difference
between
the
fair
value
of
the
collateral
and
the
amortized
cost
basis
of
the
asset
as
of
the
reporting
date
when
applying
the
collateral
maintenance
practical
expedient.
Accrued
Interest
Receivable
FASB
ASC
Topic
326
includes
accrued
interest
receivable
in
the
amortized
cost
basis
of
a
financial
asset.
As
a
result,
accrued
interest
receivable
is
included
in
the
amounts
for
which
ACLs
are
estimated.
Generally,
any
accrued
interest
receivable
that
is
not
collectible
is
written
off
against
the
related
ACL.
FASB
ASC
Topic
326
permits
a
series
of
independent
accounting
policy
elections
related
to
accrued
interest
receivable
that
alter
the
accounting
treatment
described
in
the
preceding
paragraph.
These
elections
are
made
upon
adoption
of
FASB
ASC
Topic
326
and
may
differ
by
class
of
financing
receivable
or
major
security-type
level.
The
available
accounting
policy
elections
[Footnote
20
-
The
accounting
policy
elections
related
to
accrued
interest
receivable
that
are
described
in
this
paragraph
also
apply
to
accrued
interest
receivable
for
an
available-for-sale
debt
security
that,
for
purposes
of
identifying
and
measuring
an
impairment,
exclude
the
applicable
accrued
interest
from
both
the
fair
value
and
amortized
cost
basis
of
the
securities.
End of Footnote 20.]
are:
•
Management
may
elect
not
to
measure
ACLs
for
accrued
interest
receivable
if
uncollectible
accrued
interest
is
written
off
in
a
timely
manner.
Management
should
define
and
document
its
definition
of
a
timely
write-off.
•
Management
may
elect
to
write
off
accrued
interest
receivable
by
either
reversing
interest
income,
recognizing
the
loss
through
PCLs,
or
through
a
combination
of
both
methods.
•
Management
may
elect
to
separately
present
accrued
interest
receivable
from
the
associated
financial
asset
in
its
regulatory
reports
and
financial
statements,
if
applicable.
The
accrued
interest
receivable
is
presented
net
of
ACLs
(if
any).
Financial
Assets
with
Zero
Credit
Loss
Expectations
There
may
be
certain
financial
assets
for
which
the
expectation
of
credit
loss
is
zero
after
evaluating
historical
loss
information,
making
necessary
adjustments
for
current
conditions
and
reasonable
and
supportable
forecasts,
and
considering
any
collateral
or
guarantee
arrangements
that
are
not
free-standing
contracts.
Factors
to
consider
when
evaluating
whether
expectations
of
zero
credit
loss
are
appropriate
may
include,
but
are
not
limited
to:
•
A
long
history
of
zero
credit
loss;
•
A
financial
asset
that
is
fully
secured
by
cash
or
cash
equivalents;
•
High
credit
ratings
from
rating
agencies
with
no
expected
future
downgrade;
21
-
Management
should
not
rely
solely
on
credit
rating
agencies
but
should
also
make
its
own
assessment
based
on
third
party
research,
default
statistics,
and
other
data
that
may
indicate
a
decline
in
credit
rating.
End of Footnote 21.]
•
Principal
and
interest
payments
that
are
guaranteed
by
the
U.S.
government;
Page
12
of
21
•
The
issuer,
guarantor,
or
sponsor
can
print
its
own
currency
and
the
currency
is
held
by
other
central
banks
as
reserve
currency;
and
•
The
interest
rate
on
the
security
is
recognized
as
a
risk-free
rate.
A
loan
that
is
fully
secured
by
cash
or
cash
equivalents,
such
as
certificates
of
deposit
issued
by
the
lending
institution,
would
likely
have
zero
credit
loss
expectations.
Similarly,
the
guaranteed
portion
of
a
U.S.
Small
Business
Administration
(SBA)
loan
or
security
purchased
on
the
secondary
market
through
the
SBA's
fiscal
and
transfer
agent
would
likely
have
zero
credit
loss
expectations
if
these
financial
assets
are
unconditionally
guaranteed
by
the
U.S.
government.
Examples
of
held-to-maturity
debt
securities
that
may
result
in
expectations
of
zero
credit
loss
include
U.S.
Treasury
securities
as
well
as
mortgage-backed
securities
issued
and
guaranteed
by
the
Government
National
Mortgage
Association,
the
Federal
Home
Loan
Mortgage
Corporation,
and
the
Federal
National
Mortgage
Association.
Assumptions
related
to
zero
credit
loss
expectations
should
be
included
in
the
institution's
ACL
documentation.
Estimated
Credit
Losses
for
Off-Balance-Sheet
Credit
Exposures
FASB
ASC
Topic
326
requires
that
an
institution
estimate
expected
credit
losses
for
off-
balance-sheet
credit
exposures
within
the
scope
of
FASB
ASC
Topic
326
over
the
contractual
period
during
which
the
institution
is
exposed
to
credit
risk.
The
estimate
of
expected
credit
losses
should
take
into
consideration
the
likelihood
that
funding
will
occur
as
well
as
the
amount
expected
to
be
funded
over
the
estimated
remaining
contractual
term
of
the
off-balance-sheet
credit
exposures.
Management
should
not
record
an
estimate
of
expected
credit
losses
for
off-
balance-sheet
exposures
that
are
unconditionally
cancellable
by
the
issuer.
Management
must
evaluate
expected
credit
losses
for
off-balance-sheet
credit
exposures
as
of
each
reporting
date.
While
the
process
for
estimating
expected
credit
losses
for
these
exposures
is
similar
to
the
one
used
for
on-balance-sheet
financial
assets,
these
estimated
credit
losses
are
not
recorded
as
part
of
the
ACLs
because
cash
has
not
yet
been
disbursed
to
fund
the
contractual
obligation
to
extend
credit.
Instead,
these
loss
estimates
are
recorded
as
a
liability,
separate
and
distinct
from
the
ACLs.
[Footnote
22
-
The
ACL
associated
with
off-balance-sheet
credit
exposures
is
included
in
the
“
Allowance
for
credit
losses
on
off-
balance-sheet
credit
exposures
”
in
Schedule
RC-G
-
Other
Liabilities
in
the
Call
Report
and
in
the
Liabilities
schedule
in
NCUA
Call
Report
Form
5300.
End of Footnote 22.]
The
amount
needed
to
adjust
the
liability
for
expected
credit
losses
for
off-balance-sheet
credit
exposures
as
of
each
reporting
date
is
reported
in
net
income.
Measurement
of
the
ACL
for
Available-for-Sale
Debt
Securities
FASB
ASC
Subtopic
326-30,
Financial
Instruments
-
Credit
Losses
-
Available-for-Sale
Debt
Securities
(FASB
ASC
Subtopic
326-30)
describes
the
accounting
for
expected
credit
losses
associated
with
available-for-sale
debt
securities.
Credit
losses
for
available-for-sale
debt
securities
are
evaluated
as
of
each
reporting
date
when
the
fair
value
is
less
than
amortized
cost.
FASB
ASC
Subtopic
326-30
requires
credit
losses
to
be
calculated
individually,
rather
than
collectively,
using
a
discounted
cash
flow
method,
through
which
management
compares
the
present
value
of
expected
cash
flows
with
the
amortized
cost
basis
of
the
security.
An
ACL
is
Page
13
of
21
established,
with
a
charge
to
the
PCL,
to
reflect
the
credit
loss
component
of
the
decline
in
fair
value
below
amortized
cost.
If
the
fair
value
of
the
security
increases
over
time,
any
ACL
that
has
not
been
written
off
may
be
reversed
through
a
credit
to
the
PCL.
The
ACL
for
an
available-
for-sale
debt
security
is
limited
by
the
amount
that
the
fair
value
is
less
than
the
amortized
cost,
which
is
referred
to
as
the
fair
value
floor.
If
management
intends
to
sell
an
available-for-sale
debt
security
or
will
more
likely
than
not
be
required
to
sell
the
security
before
recovery
of
the
amortized
cost
basis,
the
security's
ACL
should
be
written
off
and
the
amortized
cost
basis
of
the
security
should
be
written
down
to
its
fair
value
at
the
reporting
date
with
any
incremental
impairment
reported
in
income.
A
change
during
the
reporting
period
in
the
non-credit
component
of
any
decline
in
fair
value
below
amortized
cost
on
an
available-for-sale
debt
security
is
reported
in
other
comprehensive
income,
net
of
applicable
income
taxes.
[Footnote
23
-
Non-credit
impairment
on
an
available-for-sale
debt
security
that
is
not
required
to
be
recorded
through
the
ACL
should
be
reported
in
other
comprehensive
income
as
described
in
ASC
326-30-35-2.
End of Footnote 23.]
When
evaluating
impairment
for
available-for-sale
debt
securities,
management
may
evaluate
the
amortized
cost
basis
including
accrued
interest
receivable,
or
may
evaluate
the
accrued
interest
receivable
separately
from
the
remaining
amortized
cost
basis.
If
evaluated
separately,
accrued
interest
receivable
is
excluded
from
both
the
fair
value
of
the
available-for-
sale
debt
security
and
its
amortized
cost
basis.
[Footnote
24
-
The
accounting
policy
elections
described
in
the
“
Accrued
Interest
Receivable
”
section
of
this
policy
statement
apply
to
accrued
interest
receivable
recorded
for
an
available-for-sale
debt
security
if
an
institution
excludes
applicable
accrued
interest
receivable
from
both
the
fair
value
and
amortized
cost
basis
of
the
security
for
purposes
of
identifying
and
measuring
impairment.
End of Footnote 24.]
Documentation
Standards
For
financial
and
regulatory
reporting
purposes,
ACLs
and
PCLs
must
be
determined
in
accordance
with
GAAP.
ACLs
and
PCLs
should
be
well
documented,
with
clear
explanations
of
the
supporting
analyses
and
rationale.
Sound
policies,
procedures,
and
control
systems
should
be
appropriately
tailored
to
an
institution's
size
and
complexity,
organizational
structure,
business
environment
and
strategy,
risk
appetite,
financial
asset
characteristics,
loan
administration
procedures,
investment
strategy,
and
management
information
systems.
[Footnote
25
-
Management
often
documents
policies,
procedures,
and
controls
related
to
ACLs
in
accounting
or
credit
risk
management
policies,
or
a
combination
thereof.
End of Footnote 25.]
Maintaining,
analyzing,
supporting,
and
documenting
appropriate
ACLs
and
PCLs
in
accordance
with
GAAP
is
consistent
with
safe
and
sound
banking
practices.
The
policies
and
procedures
governing
an
institution's
ACL
processes
and
the
controls
over
these
processes
should
be
designed,
implemented,
and
maintained
to
reasonably
estimate
expected
credit
losses
for
financial
assets
and
off-balance-sheet
credit
exposures
as
of
the
reporting
date.
The
policies
and
procedures
should
describe
management's
processes
for
evaluating
the
credit
quality
and
collectibility
of
financial
asset
portfolios,
including
reasonable
and
supportable
forecasts
about
changes
in
the
credit
quality
of
these
portfolios,
through
a
disciplined
and
consistently
applied
process
that
results
in
an
appropriate
estimate
of
the
ACLs.
Page
14
of
21
Management
should
review
and,
as
needed,
revise
the
institution's
ACL
policies
and
procedures
at
least
annually,
or
more
frequently
if
necessary.
An
institution's
policies
and
procedures
for
the
systems,
processes,
and
controls
necessary
to
maintain
appropriate
ACLs
should
address,
but
not
be
limited
to:
•
Processes
that
support
the
determination
and
maintenance
of
appropriate
levels
for
ACLs
that
are
based
on
a
comprehensive,
well-documented,
and
consistently
applied
analysis
of
an
institution's
financial
asset
portfolios
and
off-balance-sheet
credit
exposures.
The
analyses
and
loss
estimation
processes
used
should
consider
all
significant
factors
that
affect
the
credit
risk
and
collectibility
of
the
financial
asset
portfolios;
•
The
roles,
responsibilities,
and
segregation
of
duties
of
the
institution's
senior
management
and
other
personnel
who
provide
input
into
ACL
processes,
determine
ACLs,
or
review
ACLs.
These
departments
and
individuals
may
include
accounting,
financial
reporting,
treasury,
investment
management,
lending,
special
asset
or
problem
loan
workout
teams,
retail
collections
and
foreclosure
groups,
credit
review,
model
risk
management,
internal
audit,
and
others,
as
applicable.
Individuals
with
responsibilities
related
to
the
estimation
of
ACLs
should
be
competent
and
well-trained,
with
the
ability
to
escalate
material
issues;
•
Processes
for
determining
the
appropriate
historical
period(s)
to
use
as
the
basis
for
estimating
expected
credit
losses
and
approaches
for
adjusting
historical
credit
loss
information
to
reflect
differences
in
asset
specific
characteristics,
as
well
as
current
conditions
and
reasonable
and
supportable
forecasts
that
are
different
from
conditions
existing
in
the
historical
period(s);
•
Processes
for
determining
and
revising
the
appropriate
techniques
and
periods
to
revert
to
historical
credit
loss
information
when
the
contractual
term
of
a
financial
asset
or
off-
balance-sheet
credit
exposure
extends
beyond
the
reasonable
and
supportable
forecast
period(s);
•
Processes
for
segmenting
financial
assets
for
estimating
expected
credit
losses
and
periodically
evaluating
the
segments
to
determine
whether
the
assets
continue
to
share
similar
risk
characteristics;
•
Data
capture
and
reporting
systems
that
supply
the
quality
and
breadth
of
relevant
and
reliable
information
necessary,
whether
obtained
internally
or
externally,
to
support
and
document
the
estimates
of
appropriate
ACLs
for
regulatory
reporting
requirements
and,
if
applicable,
financial
statement
and
disclosure
requirements;
•
The
description
of
the
institution's
systematic
and
logical
loss
estimation
process(es)
for
determining
and
consolidating
expected
credit
losses
to
ensure
that
the
ACLs
are
recorded
in
accordance
with
GAAP
and
regulatory
reporting
requirements.
This
may
include,
but
is
not
limited
to:
o
Management's
judgments,
accounting
policy
elections,
and
application
of
practical
expedients
in
determining
the
amount
of
expected
credit
losses;
o
The
process
for
determining
when
a
loan
is
collateral-dependent;
Page
15
of
21
o
The
process
for
determining
the
fair
value
of
collateral,
if
any,
used
as
an
input
when
estimating
the
ACL,
including
the
basis
for
making
any
adjustments
to
the
market
value
conclusion
and
how
costs
to
sell,
if
applicable,
are
calculated;
o
The
process
for
determining
when
a
financial
asset
has
zero
credit
loss
expectations;
o
The
process
for
determining
expected
credit
losses
when
a
financial
asset
has
a
collateral
maintenance
provision;
and
o
A
description
of
and
support
for
qualitative
factors
that
affect
collectibility
of
financial
assets;
•
Procedures
for
validating
and
independently
reviewing
the
loss
estimation
process
as
well
as
any
changes
to
the
process
from
prior
periods;
•
Policies
and
procedures
for
the
prompt
write-off
of
financial
assets,
or
portions
of
financial
assets,
when
available
information
confirms
the
assets
to
be
uncollectible,
consistent
with
regulatory
reporting
requirements;
and
•
The
systems
of
internal
controls
used
to
confirm
that
the
ACL
processes
are
maintained
and
periodically
adjusted
in
accordance
with
GAAP
and
interagency
guidelines
establishing
standards
for
safety
and
soundness.
Internal
control
systems
for
the
ACL
estimation
processes
should:
•
Provide
reasonable
assurance
regarding
the
relevance,
reliability,
and
integrity
of
data
and
other
information
used
in
estimating
expected
credit
losses;
•
Provide
reasonable
assurance
of
compliance
with
laws,
regulations,
and
the
institution's
policies
and
procedures;
•
Provide
reasonable
assurance
that
the
institution's
financial
statements
are
prepared
in
accordance
with
GAAP,
and
the
institution's
regulatory
reports
are
prepared
in
accordance
with
the
applicable
instructions;
•
Include
a
well-defined
and
effective
loan
review
and
grading
process
that
is
consistently
applied
and
identifies,
measures,
monitors,
and
reports
asset
quality
problems
in
an
accurate,
sound
and
timely
manner.
The
loan
review
process
should
respond
to
changes
in
internal
and
external
factors
affecting
the
level
of
credit
risk
in
the
portfolio;
and
•
Include
a
well-defined
and
effective
process
for
monitoring
credit
quality
in
the
debt
securities
portfolio.
Analyzing
and
Validating
the
Overall
Measurement
of
ACLs
To
ensure
that
ACLs
are
presented
fairly,
in
accordance
with
GAAP
and
regulatory
reporting
requirements,
and
are
transparent
for
regulatory
examinations,
management
should
document
its
measurements
of
the
amounts
of
ACLs
reported
in
regulatory
reports
and
financial
statements,
if
applicable,
for
each
type
of
financial
asset
(e.g.,
loans,
held-to-maturity
debt
securities,
and
available-for-sale
debt
securities)
and
for
off-balance-sheet
credit
exposures.
This
documentation
should
include
ACL
calculations,
qualitative
adjustments,
and
any
adjustments
to
the
ACLs
that
are
required
as
part
of
the
internal
review
and
challenge
process.
The
board
of
directors,
or
a
committee
thereof,
should
review
management's
assessments
of
and
justifications
for
the
reported
amounts
of
ACLs.
Page
16
of
21
Various
techniques
are
available
to
assist
management
in
analyzing
and
evaluating
the
ACLs.
For
example,
comparing
estimates
of
expected
credit
losses
to
actual
write-offs
in
aggregate,
and
by
portfolio,
may
enable
management
to
assess
whether
the
institution's
loss
estimation
process
is
sufficiently
designed.
[Footnote
26
-
Institutions
using
models
in
the
loss
estimation
process
may
incorporate
a
qualitative
factor
adjustment
in
the
estimate
of
expected
credit
losses
to
capture
the
variance
between
modeled
credit
loss
expectations
and
actual
historical
losses
when
the
model
is
still
considered
predictive
and
fit
for
use.
Institutions
should
monitor
this
variance,
as
well
as
changes
to
the
variance,
to
determine
if
the
variance
is
significant
or
material
enough
to
warrant
further
changes
to
the
model.
End of Footnote 26.]
Further,
comparing
the
estimate
of
ACLs
to
actual
write-offs
at
the
financial
asset
portfolio
level
allows
management
to
analyze
changing
portfolio
characteristics,
such
as
the
volume
of
assets
or
increases
in
write-off
rates,
which
may
affect
future
forecast
adjustments.
Techniques
applied
in
these
instances
do
not
have
to
be
complex
to
be
effective,
but,
if
used,
should
be
commensurate
with
the
institution's
size
and
complexity.
Ratio
analysis
may
also
be
useful
for
evaluating
the
overall
reasonableness
of
ACLs.
Ratio
analysis
assists
in
identifying
divergent
or
emerging
trends
in
the
relationship
of
ACLs
to
other
factors
such
as
adversely
classified
or
graded
loans,
past
due
and
nonaccrual
loans,
total
loans,
historical
gross
write-offs,
net
write-offs,
and
historic
delinquency
and
default
trends
for
securities.
Comparing
the
institution's
ACLs
to
those
of
peer
institutions
may
provide
management
with
limited
insight
into
management's
own
ACL
estimates.
Management
should
apply
caution
when
performing
peer
comparisons
as
there
may
be
significant
differences
among
peer
institutions
in
the
mix
of
financial
asset
portfolios,
reasonable
and
supportable
forecast
period
assumptions,
reversion
techniques,
the
data
used
for
historical
loss
information,
and
other
factors.
When
used
prudently,
comparisons
of
estimated
expected
losses
to
actual
write-offs,
ratio
analysis,
and
peer
comparisons
can
be
helpful
as
a
supplemental
check
on
the
reasonableness
of
management's
assumptions
and
analyses.
Because
appropriate
ACLs
are
institution-specific
estimates,
the
use
of
comparisons
does
not
eliminate
the
need
for
a
comprehensive
analysis
of
financial
asset
portfolios
and
the
factors
affecting
their
collectibility.
When
an
appropriate
expected
credit
loss
framework
has
been
used
to
estimate
expected
credit
losses,
it
is
inappropriate
for
the
board
of
directors
or
management
to
make
further
adjustments
to
ACLs
for
the
sole
purpose
of
reporting
ACLs
that
correspond
to
a
peer
group
median,
a
target
ratio,
or
a
budgeted
amount.
Additionally,
neither
the
board
of
directors
nor
management
should
further
adjust
ACLs
beyond
what
has
been
appropriately
measured
and
documented
in
accordance
with
FASB
ASC
Topic
326.
After
analyzing
ACLs,
management
should
periodically
validate
the
loss
estimation
process,
and
any
changes
to
the
process,
to
confirm
that
the
process
remains
appropriate
for
the
institution's
size,
complexity,
and
risk
profile.
The
validation
process
should
include
procedures
for
review
by
a
party
with
appropriate
knowledge,
technical
expertise,
and
experience
who
is
independent
of
the
institution's
credit
approval
and
ACL
estimation
processes.
A
party
who
is
independent
of
these
processes
could
be
from
internal
audit
staff,
a
risk
management
unit
of
the
institution
independent
of
management
supervising
these
processes,
or
a
contracted
third-party.
Page
17
of
21
One
party
need
not
perform
the
entire
analysis
as
the
validation
may
be
divided
among
various
independent
parties.
[Footnote
27
-
Engaging
the
institution's
external
auditor
to
perform
the
validation
process
described
in
this
paragraph
when
the
external
auditor
also
conducts
the
institution's
independent
financial
statement
audit,
may
impair
the
auditor's
independence
under
applicable
auditor
independence
standards
and
prevent
the
auditor
from
performing
an
independent
audit
of
the
institution's
financial
statements.
End of Footnote 27.]
Responsibilities
of
the
Board
of
Directors
The
board
of
directors,
or
a
committee
thereof,
is
responsible
for
overseeing
management's
significant
judgments
and
estimates
used
in
determining
appropriate
ACLs.
Evidence
of
the
board
of
directors'
oversight
activities
is
subject
to
review
by
examiners.
These
activities
should
include,
but
are
not
limited
to:
•
Retaining
experienced
and
qualified
management
to
oversee
all
ACL
and
PCL
activities;
•
Reviewing
and
approving
the
institution's
written
loss
estimation
policies,
including
any
revisions
thereto,
at
least
annually;
•
Reviewing
management's
assessment
of
the
loan
review
system
and
management's
conclusion
and
support
for
whether
the
system
is
sound
and
appropriate
for
the
institution's
size
and
complexity;
•
Reviewing
management's
assessment
of
the
effectiveness
of
processes
and
controls
for
monitoring
the
credit
quality
of
the
investment
portfolio;
•
Reviewing
management's
assessments
of
and
justifications
for
the
estimated
amounts
reported
each
period
for
the
ACLs
and
the
PCLs;
•
Requiring
management
to
periodically
validate,
and,
when
appropriate,
revise
loss
estimation
methods;
•
Approving
the
internal
and
external
audit
plans
for
the
ACLs,
as
applicable;
and
•
Reviewing
any
identified
audit
findings
and
monitoring
resolution
of
those
items.
Responsibilities
of
Management
Management
is
responsible
for
maintaining
ACLs
at
appropriate
levels
and
for
documenting
its
analyses
in
accordance
with
the
concepts
and
requirements
set
forth
in
GAAP,
regulatory
reporting
requirements,
and
this
policy
statement.
Management
should
evaluate
the
ACLs
reported
on
the
balance
sheet
as
of
the
end
of
each
period
(and
for
credit
unions,
prior
to
paying
dividends),
and
debit
or
credit
the
related
PCLs
to
bring
the
ACLs
to
an
appropriate
level
as
of
each
reporting
date.
The
determination
of
the
amounts
of
the
ACLs
and
the
PCLs
should
be
based
on
management's
current
judgments
about
the
credit
quality
of
the
institution's
financial
assets
and
should
consider
known
and
expected
relevant
internal
and
external
factors
that
significantly
affect
collectibility
over
reasonable
and
supportable
forecast
periods
for
the
institution's
financial
assets
as
well
as
appropriate
reversion
techniques
applied
to
periods
beyond
the
reasonable
and
supportable
forecast
periods.
Management's
evaluations
are
subject
to
review
by
examiners.
Page
18
of
21
In
carrying
out
its
responsibility
for
maintaining
appropriate
ACLs,
management
should
adopt
and
adhere
to
written
policies
and
procedures
that
are
appropriate
to
the
institution's
size
and
the
nature,
scope,
and
risk
of
its
lending
and
investing
activities.
These
policies
and
procedures
should
address
the
processes
and
activities
described
in
the
“
Documentation
Standards
”
section
of
this
policy
statement.
Management
fulfills
other
responsibilities
that
aid
in
the
maintenance
of
appropriate
ACLs.
These
activities
include,
but
are
not
limited
to:
•
Establishing
and
maintaining
appropriate
governance
activities
for
the
loss
estimation
process(es).
These
activities
may
include
reviewing
and
challenging
the
assumptions
used
in
estimating
expected
credit
losses
and
designing
and
executing
effective
internal
controls
over
the
credit
loss
estimation
method(s);
•
Periodically
performing
procedures
that
compare
credit
loss
estimates
to
actual
write
offs,
at
the
portfolio
level
and
in
aggregate,
to
confirm
that
amounts
recorded
in
the
ACLs
were
sufficient
to
cover
actual
credit
losses.
This
analysis
supports
that
appropriate
ACLs
were
recorded
and
provides
insight
into
the
loss
estimation
process's
ability
to
estimate
expected
credit
losses.
This
analysis
is
not
intended
to
reflect
the
accuracy
of
management's
economic
forecasts;
•
Periodically
validating
the
loss
estimation
process(es),
including
changes,
if
any,
to
confirm
it
is
appropriate
for
the
institution;
and
•
Engaging
in
sound
risk
management
of
third
parties
involved
[Footnote
28
-
Guidance
on
third
party
service
providers
may
be
found
in
SR
Letter
13-19/Consumer
Affairs
Letter
13-21,
Guidance
on
Managing
Outsourcing
Risk
(FRB);
Financial
Institution
Letter
(FIL)
44-2008,
Guidance
for
Managing
Third
Party
Risk
(FDIC);
Supervisory
Letter
No.
07-01,
Evaluating
Third
Party
Relationships
(NCUA);
and
OCC
Bulletin
2013-29,
Third
Party
Relationships:
Risk
Management
Guidance
,
OCC
Bulletin
2017-7,
Third
Party
Relationships:
Supplemental
Examination
Procedures
,
and
OCC
Bulletin
2017-21,
Third
Party
Relationships:
Frequently
Asked
Questions
to
Supplement
OCC
Bulletin
2013-29
.
End of Footnote 28.]
in
ACL
estimation
process(es),
if
applicable,
to
ensure
that
the
loss
estimation
processes
are
commensurate
with
the
level
of
risk,
the
complexity
of
the
third-party
relationship
and
the
institution's
organizational
structure.
Additionally,
if
an
institution
uses
loss
estimation
models
in
determining
expected
credit
losses,
management
should
evaluate
the
models
before
they
are
employed
and
modify
the
model
logic
and
assumptions,
as
needed,
to
help
ensure
that
the
resulting
loss
estimates
are
consistent
with
GAAP
and
regulatory
reporting
requirements.
[Footnote
29
-
See
the
interagency
statement
titled,
Supervisory
Guidance
on
Model
Risk
Management,
published
by
the
Board
in
SR
Letter
11-7
and
OCC
Bulletin
2011-12
on
April
4,
2011.
The
statement
also
addresses
the
incorporation
of
vendor
products
into
an
institution's
model
risk
management
framework
following
the
same
principles
relevant
to
in-house
models.
The
FDIC
adopted
the
interagency
statement
on
June
7,
2017.
Institutions
supervised
by
the
FDIC
should
refer
to
FIL-22-2017,
Adoption
of
Supervisory
Guidance
on
Model
Risk
Management
,
including
the
statement
of
applicability
in
the
FIL.
End of Footnote 29.]
To
demonstrate
such
consistency,
management
should
document
its
evaluations
and
conclusions
regarding
the
appropriateness
of
estimating
credit
losses
with
models.
When
used
for
multiple
purposes
within
an
institution,
models
should
be
specifically
adjusted
and
validated
for
use
in
ACL
loss
estimation
processes.
Management
should
document
and
support
any
adjustments
made
to
the
models,
the
outputs
of
Page
19
of
21
the
models,
and
compensating
controls
applied
in
determining
the
estimated
expected
credit
losses.
Examiner
Review
of
ACLs
Examiners
are
expected
to
assess
the
appropriateness
of
management's
loss
estimation
processes
and
the
appropriateness
of
the
institution's
ACL
balances
as
part
of
their
supervisory
activities.
The
review
of
ACLs,
including
the
depth
of
the
examiner's
assessment,
should
be
commensurate
with
the
institution's
size,
complexity,
and
risk
profile.
As
part
of
their
supervisory
activities,
examiners
generally
assess
the
credit
quality
and
credit
risk
of
an
institution's
financial
asset
portfolios,
the
adequacy
of
the
institution's
credit
loss
estimation
processes,
the
adequacy
of
supporting
documentation,
and
the
appropriateness
of
the
reported
ACLs
and
PCLs
in
the
institution's
regulatory
reports
and
financial
statements,
if
applicable.
Examiners
may
consider
the
significant
factors
that
affect
collectibility,
including
the
value
of
collateral
securing
financial
assets
and
any
other
repayment
sources.
Supervisory
activities
may
include
evaluating
management's
effectiveness
in
assessing
credit
risk
for
debt
securities
(both
prior
to
purchase
and
on
an
on-going
basis).
In
reviewing
the
appropriateness
of
an
institution's
ACLs,
examiners
may:
•
Evaluate
the
institution's
ACL
policies
and
procedures
and
assess
the
loss
estimation
method(s)
used
to
arrive
at
overall
estimates
of
ACLs,
including
the
documentation
supporting
the
reasonableness
of
management's
assumptions,
valuations,
and
judgments.
Supporting
activities
may
include,
but,
are
not
limited
to:
o
Evaluating
whether
management
has
appropriately
considered
historical
loss
information,
current
conditions,
and
reasonable
and
supportable
forecasts,
including
significant
qualitative
factors
that
affect
the
collectibility
of
the
financial
asset
portfolios;
o
Assessing
loss
estimation
techniques,
including
loss
estimation
models,
if
applicable,
as
well
as
the
incorporation
of
qualitative
adjustments
to
determine
whether
the
resulting
estimates
of
expected
credit
losses
are
in
conformity
with
GAAP
and
regulatory
reporting
requirements;
and
o
Evaluating
the
adequacy
of
the
documentation
and
the
effectiveness
of
the
controls
used
to
support
the
measurement
of
the
ACLs;
•
Assess
the
effectiveness
of
board
oversight
as
well
as
management's
effectiveness
in
identifying,
measuring,
monitoring,
and
controlling
credit
risk.
This
may
include,
but
is
not
limited
to,
a
review
of
underwriting
standards
and
practices,
portfolio
composition
and
trends,
credit
risk
review
functions,
risk
rating
systems,
credit
administration
practices,
investment
securities
management
practices,
and
related
management
information
systems
and
reports;
•
Review
the
appropriateness
and
reasonableness
of
the
overall
level
of
the
ACLs
relative
to
the
level
of
credit
risk,
the
complexity
of
the
institution's
financial
asset
portfolios,
and
available
information
relevant
to
assessing
collectibility,
including
consideration
of
current
conditions
and
reasonable
and
supportable
forecasts.
Examiners
may
include
a
quantitative
analysis
(e.g.,
using
management's
results
comparing
expected
write-offs
to
actual
write-offs
as
well
as
ratio
analysis)
to
assess
the
appropriateness
of
the
ACLs.
Page
20
of
21
This
quantitative
analysis
may
be
used
to
determine
the
reasonableness
of
management's
assumptions,
valuations,
and
judgments
and
understand
variances
between
actual
and
estimated
credit
losses.
Loss
estimates
that
are
consistently
and
materially
over
or
under
predicting
actual
losses
may
indicate
a
weakness
in
the
loss
forecasting
process;
•
Review
the
ACLs
reported
in
the
institution's
regulatory
reports
and
in
any
financial
statements
and
other
key
financial
reports
to
determine
whether
the
reported
amounts
reconcile
to
the
institution's
estimate
of
the
ACLs.
The
consolidated
loss
estimates
determined
by
the
institution's
loss
estimation
method(s)
should
be
consistent
with
the
final
ACLs
reported
in
its
regulatory
reports
and
financial
statements,
if
applicable;
•
Verify
that
models
used
in
the
loss
estimation
process,
if
any,
are
subject
to
initial
and
ongoing
validation
activities.
Validation
activities
include
evaluating
and
concluding
on
the
conceptual
soundness
of
the
model,
including
developmental
evidence,
performing
ongoing
monitoring
activities,
including
process
verification
and
benchmarking,
and
analyzing
model
output. [Footnote
30
-
See
footnote
29.
End of Footnote 30.]
Examiners
may
review
model
validation
findings,
management's
response
to
those
findings,
and
applicable
action
plans
to
remediate
any
concerns,
if
applicable.
Examiners
may
also
assess
the
adequacy
of
the
institution's
processes
to
implement
changes
in
a
timely
manner;
and
•
Review
the
effectiveness
of
the
institution's
third-party
risk
management
framework
associated
with
the
estimation
of
ACLs,
if
applicable,
to
assess
whether
the
processes
are
commensurate
with
the
level
of
risk,
the
complexity
and
nature
of
the
relationship,
and
the
institution's
organizational
structure.
Examiners
may
determine
whether
management
monitors
material
risks
and
deficiencies
in
third-party
relationships,
and
takes
appropriate
action
as
needed.
[Footnote
31
-
See
footnote
28.
End of Footnote 31.]
When
assessing
the
appropriateness
of
ACLs,
examiners
should
recognize
that
the
processes,
loss
estimation
methods,
and
underlying
assumptions
an
institution
uses
to
calculate
ACLs
require
the
exercise
of
a
substantial
degree
of
management
judgment.
Even
when
an
institution
maintains
sound
procedures,
controls,
and
monitoring
activities,
an
estimate
of
expected
credit
losses
is
not
a
single
precise
amount
and
may
result
in
a
range
of
acceptable
outcomes
for
these
estimates.
This
is
a
result
of
the
flexibility
FASB
ASC
Topic
326
provides
institutions
in
selecting
loss
estimation
methods
and
the
wide
range
of
qualitative
and
forecasting
factors
that
are
considered.
Management's
ability
to
estimate
expected
credit
losses
should
improve
over
the
contractual
term
of
financial
assets
as
substantive
information
accumulates
regarding
the
factors
affecting
repayment
prospects.
Examiners
generally
should
accept
an
institution's
ACL
estimates
and
not
seek
adjustments
to
the
ACLs,
when
management
has
provided
adequate
support
for
the
loss
estimation
process
employed,
and
the
ACL
balances
and
the
assumptions
used
in
the
ACL
estimates
are
in
accordance
with
GAAP
and
regulatory
reporting
requirements.
It
is
inappropriate
for
examiners
to
seek
adjustments
to
ACLs
for
the
sole
purpose
of
achieving
ACL
levels
that
correspond
to
a
peer
group
median,
a
target
ratio,
or
a
benchmark
amount
when
Page
21
of
21
management
has
used
an
appropriate
expected
credit
loss
framework
to
estimate
expected
credit
losses.
If
the
examiner
concludes
that
an
institution's
reported
ACLs
are
not
appropriate
or
determines
that
its
ACL
evaluation
processes
or
loss
estimation
method(s)
are
otherwise
deficient,
these
concerns
should
be
noted
in
the
report
of
examination
and
communicated
to
the
board
of
directors
and
senior
management.
[Footnote
32
-
Each
agency
has
formal
and
informal
communication
channels
for
sharing
supervisory
information
with
the
board
of
directors
and
management
depending
on
agency
practices
and
the
nature
of
the
information
being
shared.
These
channels
may
include,
but
are
not
limited
to,
institution
specific
supervisory
letters,
letters
to
the
industry,
transmittal
letters,
visitation
findings
summary
letters,
targeted
review
conclusion
letters,
or
official
examination
or
inspection
reports.
End of Footnote 32.]
Additional
supervisory
action
may
be
taken
based
on
the
magnitude
of
the
shortcomings
in
ACLs,
including
the
materiality
of
any
errors
in
the
reported
amounts
of
ACLs
.
