Interagency Policy Statement on Allowances for Credit Losses (Revised April 2023)

This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents.

Rules and Regulations

Federal Register

25479

Vol. 88, No. 81

Thursday, April 27, 2023

1 85 FR 32991 (June 1, 2020).

2 44 U.S.C. 3501–3521.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 30

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. OP–1680]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 364

RIN 3064–ZA10

NATIONAL CREDIT UNION

ADMINISTRATION

12 CFR Part 741

RIN 3133–AF05

Interagency Policy Statement on

Allowances for Credit Losses (Revised

April 2023)

AGENCY: Office of the Comptroller of the

Currency (OCC), Treasury; Board of

Governors of the Federal Reserve

System (Board); Federal Deposit

Insurance Corporation (FDIC); and

National Credit Union Administration

(NCUA).

ACTION: Final interagency policy

statement.

SUMMARY: The Office of the Comptroller

of the Currency, the Board of Governors

of the Federal Reserve System, the

Federal Deposit Insurance Corporation,

and the National Credit Union

Administration (collectively, the

agencies) are issuing a revised

interagency policy statement on

allowances for credit losses (ACLs)

(revised statement). The agencies are

issuing the revised statement in

response to changes to U.S. generally

accepted accounting principles (GAAP)

as promulgated by the Financial

Accounting Standards Board (FASB) in

Accounting Standards Update (ASU)

2022–02, Financial Instruments—Credit

Losses (Topic 326): Troubled Debt

Restructurings and Vintage Disclosures

issued in March 2022.

DATES: The interagency policy statement

is available on April 27, 2023.

FOR FURTHER INFORMATION CONTACT:

OCC: Amanda Freedle, Deputy

Comptroller and Chief Accountant,

by the Financial

Accounting Standards Board (FASB) in

Accounting Standards Update (ASU)

2022–02, Financial Instruments—Credit

Losses (Topic 326): Troubled Debt

Restructurings and Vintage Disclosures

issued in March 2022.

DATES: The interagency policy statement

is available on April 27, 2023.

FOR FURTHER INFORMATION CONTACT:

OCC: Amanda Freedle, Deputy

Comptroller and Chief Accountant,

(202) 649–6317; or Ashley Rangel,

Deputy Chief Accountant, (202) 649–

5648, Office of the Chief Accountant; or

Kevin Korzeniewski, Counsel, Chief

Counsel’s Office, (202) 649–5490. If you

are deaf, hard of hearing, or have a

speech disability, please dial 7–1–1 to

access telecommunications relay

services.

Board: Lara Lylozian, Deputy

Associate Director and Chief

Accountant, (202) 475–6656; or Kevin

Chiu, Senior Accounting Policy Analyst,

(202) 912–4608, Division of Supervision

and Regulation; or David Imhoff,

Attorney, (202) 452–2249, Legal

Division, Board of Governors of the

Federal Reserve System, 20th and C

Streets NW, Washington, DC 20551. For

users of telephone systems via text

telephone (TTY) or any TTY-based

Telecommunications Relay Services

(TRS), please call 711 from any

telephone, anywhere in the United

States.

FDIC: Shannon Beattie, Chief

Accountant, (202) 898–3952; or Bryan

Jonasson, Deputy Chief Accountant,

(781) 794–5641; or Andrew Overton,

Assistant Chief Accountant, (202)-898–

8922; Division of Risk Management

Supervision; or Catherine Wood,

Counsel, (202) 898–3788, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW,

Washington, DC 20429.

NCUA: Technical information: Chris

McGrath, Acting Chief Accountant,

Office of Examination and Insurance,

ty Chief Accountant,

(781) 794–5641; or Andrew Overton,

Assistant Chief Accountant, (202)-898–

8922; Division of Risk Management

Supervision; or Catherine Wood,

Counsel, (202) 898–3788, Legal

Division, Federal Deposit Insurance

Corporation, 550 17th Street NW,

Washington, DC 20429.

NCUA: Technical information: Chris

McGrath, Acting Chief Accountant,

Office of Examination and Insurance,

(703) 518–6611 or Legal information:

Marvin Shaw, Staff Attorney, Office of

General Counsel, (703) 548–2778.

National Credit Union Administration,

1775 Duke Street, Alexandria, VA

22314.

SUPPLEMENTARY INFORMATION:

I. Background

On June 1, 2020, the agencies

published in the Federal Register an

interagency policy statement 1 (original

statement) in response to changes to

GAAP as promulgated by the FASB in

ASU 2016–13, Financial Instruments—

Credit Losses (Topic 326): Measurement

of Credit Losses on Financial

Instruments and subsequent

amendments issued between June 2016

and the date of issuance of the original

statement (collectively, Topic 326).

In March 2022, the FASB further

amended Topic 326 with the issuance of

ASU 2022–02, Financial Instruments—

Credit Losses (Topic 326): Troubled

Debt Restructurings and Vintage

Disclosures (ASU 2022–02). ASU 2022–

02 eliminates the recognition and

measurement accounting guidance for

Troubled Debt Restructurings (TDRs) by

creditors upon adoption of Topic 326.

II. Current Actions

To maintain conformance with GAAP

following the issuance of ASU 2022–02,

the agencies are revising the original

statement to remove references to TDRs.

The agencies are also correcting a

citation to a regulation in footnote 4 of

the original statement. No other changes

are being made to the original statement.

Through this notice, the agencies are

publishing the revised statement

Actions

To maintain conformance with GAAP

following the issuance of ASU 2022–02,

the agencies are revising the original

statement to remove references to TDRs.

The agencies are also correcting a

citation to a regulation in footnote 4 of

the original statement. No other changes

are being made to the original statement.

Through this notice, the agencies are

publishing the revised statement.

Consistent with the original

statement, the revised statement

continues to describe the measurement

of expected credit losses under the

current expected credit losses (CECL)

methodology and the accounting for

impairment on available-for-sale debt

securities in accordance with Topic 326;

the design, documentation, and

validation of expected credit loss

estimation processes, including the

internal controls over these processes;

the maintenance of appropriate ACLs;

the responsibilities of boards of

directors and management; and

examiner reviews of ACLs.

III. Paperwork Reduction Act

In accordance with the requirements

of the Paperwork Reduction Act of 1995

(PRA),2 the agencies may not conduct or

sponsor, and the respondent is not

required to respond to, an information

collection unless it displays a currently

valid Office of Management and Budget

(OMB) control number.

The revised statement does not create

any new or revise any existing

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sor, and the respondent is not

required to respond to, an information

collection unless it displays a currently

valid Office of Management and Budget

(OMB) control number.

The revised statement does not create

any new or revise any existing

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Federal Register / Vol. 88, No. 81 / Thursday, April 27, 2023 / Rules and Regulations

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.

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

mate Expected Credit

Losses, and FASB Staff Q&A-Topic 326, No. 2,

Developing an Estimate of Expected Credit Losses

on Financial Assets.

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.

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.

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

3.

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).

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.

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

(12 U.S.C. 1786) and 12 CFR 741.3.

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.

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’’).

collections of information under the

PRA. Therefore, no information

collection request will be submitted to

the OMB for review.

IV. Final Interagency Policy Statement

on Allowances for Credit Losses

The text of the final interagency

Policy Statement is as follows:

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

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 2016.1

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).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.

This policy statement is effective at

the time of each institution’s adoption

of FASB ASC Topic 326.3 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)

e 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,4 safe and sound banking

practices, and the agencies’ codified

guidelines establishing standards for

safety and soundness.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 It also describes the

estimation of the ACL for an available-

for-sale debt security in accordance with

FASB ASC Subtopic 326–30

es.

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 It also describes the

estimation 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.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:

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8 Refer to FASB ASC Subtopic 326–30, Financial

Instruments—Credit Losses—Available-for-Sale

Debt Securities (FASB ASC Subtopic 326–30).

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.

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

ractual Term of a

Financial Asset’’ section in this policy statement.

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.

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.

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.

• 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

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; 8

• Loans held-for-sale;

• Policy loan receivables of an

insurance entity;

• 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 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.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

SC 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 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:

• 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

ions;

• 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

s 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,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 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

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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.

expected credit losses over the

contractual term of its financial assets,

considering expected prepayments

’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.

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)

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.

Institutions may develop reasonable

and supportable forecasts by using one

or more economic scenarios

evant 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.

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

t 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

gement 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.

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; 13

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14 See the ‘‘Collateral-Dependent Financial

Assets’’ section of this policy statement for more

information on collateral-dependent loans.

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

nomic 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.

16 This list is not all-inclusive, and all of the

factors listed may not be relevant to all institutions.

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.

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

lateral-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.

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.

• The value of the underlying

collateral for loans that are not

collateral-dependent; 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 15 in which the

institution operates that affect the

collectibility of financial assets

gement 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 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: 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;

• 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

asts 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.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

revious 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.18

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

e 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

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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.

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

55–46

for more information.

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.

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.

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.

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.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

expected credit losses for these

qualifying assets based on the fair value

of the collateral.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 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 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

ement 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

• Principal and interest payments

that are guaranteed by the U.S.

government;

• 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

r

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

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.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

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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

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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.

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.

25 Management often documents policies,

procedures, and controls related to ACLs in

accounting or credit risk management policies, or

a combination thereof.

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 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

lect 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.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.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

ated separately, accrued interest

receivable is excluded from both the fair

value of the available-for-sale debt

security and its amortized cost basis.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.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. Management should review and,

as needed, revise the institution’s ACL

policies and procedures at least

annually, or more frequently if

necessary

y 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. 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

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

nt

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:

Æ Management’s judgments,

accounting policy elections, and

application of practical expedients in

determining the amount of expected

credit losses;

Æ The process for determining when

a loan is collateral-dependent;

Æ 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;

Æ The process for determining when

a financial asset has zero credit loss

expectations;

Æ The process for determining

expected credit losses when a financial

asset has a collateral maintenance

provision; and

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Federal Register / Vol. 88, No. 81 / Thursday, April 27, 2023 / Rules and Regulations

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

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.

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.

Æ 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

f 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

nd

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.

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.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

atio 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

appropriate 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. One party need

not perform the entire analysis as the

validation may be divided among

various independent parties.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;

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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;

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Federal Register / Vol. 88, No. 81 / Thursday, April 27, 2023 / Rules and Regulations

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.

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

esses 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.

• 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

nalyses 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.

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)

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 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

ation process(es), including

changes, if any, to confirm it is

appropriate for the institution; and

• Engaging in sound risk management

of third parties involved 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.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 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

art 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:

Æ 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;

Æ 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

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sset

portfolios;

Æ 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

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Federal Register / Vol. 88, No. 81 / Thursday, April 27, 2023 / Rules and Regulations

30 See footnote 29.

31 See footnote 28.

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.

conformity with GAAP and regulatory

reporting requirements; and

Æ 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

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. 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.30

Examiners may review model validation

findings, management’s response to

those findings, and applicable action

plans to remediate any concerns, if

applicable

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.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.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

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 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.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.

Michael J. Hsu,

Acting Comptroller of the Currency.

By order of the Board of Governors of the

Federal Reserve System.

Ann E. Misback,

Secretary of the Board.

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, on March 31,

2023.

James P. Sheesley,

Assistant Executive Secretary.

By the National Credit Union

Administration Board.

Melane Conyers-Ausbrooks,

Secretary of the Board.

[FR Doc

.

By order of the Board of Governors of the

Federal Reserve System.

Ann E. Misback,

Secretary of the Board.

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, on March 31,

2023.

James P. Sheesley,

Assistant Executive Secretary.

By the National Credit Union

Administration Board.

Melane Conyers-Ausbrooks,

Secretary of the Board.

[FR Doc. 2023–08876 Filed 4–26–23; 8:45 am]

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;

7535–01–P

DEPARTMENT OF STATE

22 CFR Part 121

[Public Notice: 11986]

RIN 1400–AF27

International Traffic in Arms

Regulations: U.S. Munitions List

Targeted Revisions

AGENCY: Department of State.

ACTION: Interim final rule; request for

comments.

SUMMARY: The Department of State (the

Department) amends the International

Traffic in Arms Regulations (ITAR) to

remove from U.S. Munitions List

(USML) Category XI certain high-energy

storage capacitors and to clearly identify

the high-energy storage capacitors that

remain in USML Category XI.

DATES: Effective date May 21, 2023.

Send comments by May 30, 2023.

ADDRESSES: Interested parties may

submit comments to the Department of

State by any of the following methods:

• Visit the Regulations.gov website at:

http://www.regulations.gov and search

for the docket number DOS–2023–0003.

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