Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION

SR 99-22 (SUP)
July 26, 1999

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE
          SUPERVISORY AND EXAMINATION STAFF AT EACH
          FEDERAL RESERVE BANK AND TO DOMESTIC BANKING
          ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE


SUBJECT: Joint Interagency Letter on the Loan Loss Allowance

                     On July 12, 1999 the Federal Reserve Board, the other federal banking agencies, and the Securities and Exchange Commission (the "agencies") issued the attached Joint Interagency Letter to Financial Institutions on the loan loss allowance.

                     The July 12 letter contains three important messages.  First, the SEC does not have a policy of seeking reductions in financial institutions' loan loss allowance levels.  Second, the SEC will consult with the banking agencies as it considers whether to take a significant action regarding an institution's loan loss reserve accounting practices.  Third, financial institutions should follow generally accepted accounting principles (GAAP) in establishing loan loss allowances, including the guidance in the Federal Reserve's policy letter (SR letter 99-13), in financial statements filed with the SEC and the banking agencies.1  This letter is intended to send a balanced and appropriately conservative message to the banking industry, bank auditors and accountants regarding this important policy area.

                     The July 12 joint interagency letter reaffirms the fundamental principles and balanced guidance presented in SR letter 99-13 by summarizing much of the previous SR letter's guidance and by referencing FASB EITF Topic D-80, which reproduces SR letter 99-13 in its entirety.  This guidance reinforces the notions that there is a high degree of management judgment in estimating an appropriate allowance and that institutions should maintain prudent and conservative, but not excessive, loan loss allowances that fall within an acceptable range of estimated losses.  Management's best estimate may be at the high end of the range.  An "unallocated" loan loss allowance is appropriate when it is determined in accordance with GAAP.

                     The new joint interagency letter reaffirms that the agencies have agreed to develop additional guidance regarding allowance documentation and disclosure issues by March 2000.  The agencies will also continue to cooperate and communicate with each other regarding accounting and transparency policy issues.

                     Reserve Banks are asked to distribute the attached Joint Interagency Letter to state member banks and bank holding companies in their districts.  Questions pertaining to this interagency statement should be directed to Gerald Edwards, Deputy Associate Director, at (202) 452-2741 or Charles Holm, Manager - Accounting Policy and Disclosure Section, at (202) 452-3502.


Richard Spillenkothen
Director


Attachment (7 KB PDF)


Cross Reference:  SR letter 99-13



Notes:

1.   SR letter 99-13 was issued on May 21, 1999.  The SR letter is available on the Board’s public website (www.federalreserve.gov) under Banking - Supervision and Regulation Letters.  Return to text


SR letters | 1999