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 01-17 (SUP)
July 6, 2001

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

SUBJECT:   Final Interagency Policy Statement on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Banks and Savings Institutions

                     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."1  This guidance was developed in consultation with Securities and Exchange Commission staff, who are issuing parallel guidance in the form of Staff Accounting Bulletin No. 102.  In general, the interagency policy statement clarifies the agencies' 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 guidance requires that a financial institution's ALLL methodology be consistent with 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, when appropriate.  Furthermore, 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 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. The Federal Reserve is adopting the FFIEC policy, effective immediately.

                    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.

                    Reserve Banks are asked to distribute a copy of this SR letter and the policy statement to appropriate members of senior management of all bank holding companies and state member banks.  If you have any questions pertaining to this policy statement, please contact Linda V. Griffith, Supervisory Financial Analyst, at 202-452-3506.


Richard Spillenkothen
Director

Attachment (2,613 KB PDF)



Notes:

1.  The FFIEC published the policy statement in the Federal Register on July 6, 2001. See Vol. 66, No. 130, pages 35629 to 35639. Return to text


SR letters | 2001