The Federal Financial Institutions Examination Council today issued a Policy Statement on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Banks and Savings Institutions.

The Policy Statement, developed in consultation with the Securities and Exchange Commission (SEC) staff, provides guidance on the design and implementation of ALLL methodologies and supporting documentation practices. Specifically, it:

• clarifies that the board of directors of each institution is responsible for ensuring that controls are in place to determine the appropriate level of the ALLL;
• states that the ALLL process must be thorough, disciplined, and consistently applied and must incorporate management's current judgments about the credit quality of the loan portfolio;
• emphasizes the banking agencies' long-standing position that institutions should maintain and support the ALLL with documentation that is consistent with their stated policies and procedures, generally accepted accounting principles (GAAP), and applicable supervisory guidance; and
• provides guidance on maintaining and documenting policies and procedures that are appropriately tailored to the size and complexity of the institution and its loan portfolio.

The Policy Statement also includes illustrations of implementation practices that institutions may find useful for enhancing their own ALLL processes; an appendix that provides examples of certain key aspects of ALLL guidance; a summary of applicable GAAP guidance; and a bibliographical list of relevant GAAP guidance, joint interagency statements, and other literature on ALLL issues.

The Policy Statement does not change existing accounting guidance in, or modify the documentation requirements of, GAAP or guidance provided in the relevant joint interagency statements. In this regard, the Policy Statement recognizes that estimating an appropriate allowance involves a high degree of management judgment and is inevitably imprecise. Accordingly, an institution may determine that the amount of loss falls within a range. In accordance with GAAP, an institution should record its best estimate within the range of loan losses.

The Policy Statement was issued in proposed form on September 7, 2000.

Parallel guidance on loan loss methodologies and documentation was issued today by the SEC staff through their Staff Accounting Bulletin 102.

The full text of the Policy Statement was published in the Federal Register today.