Written By: MEBiery
Qualitative factors will remain relevant when financial institutions are estimating allowances under the current expected credit loss model, or CECL, that is central to the new standard for accounting for credit losses, federal banking regulators on Wednesday advised.
In a new round of answers to Frequently Asked Questions, or FAQs, regulators addressed initial supervisory views on qualitative factors, data needs and other topics related to (ASU) No. 2016-13, Topic 326, Financial Instruments – Credit Losses, which takes effect as early as 2020 for SEC-registered financial institutions.
Institutions shouldn’t rely solely on past events when estimating expected credit losses, said the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the National Credit Union Administration. As a result, an institution will continue to incorporate both qualitative and quantitative factors when estimating allowances for loan and lease losses (ALLL) under CECL.
“The new credit losses standard acknowledges that, because historical experience may not fully reflect an institution’s expectations about the future, the institution should adjust historical loss information, as necessary, to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information,” the agencies wrote in a letter to financial institutions. “To adjust historical credit loss information for current conditions and reasonable and supportable forecasts, the institution should continue to consider all significant factors relevant to determining the expected collectability of financial assets as of each reporting date.”
Regulators said qualitative or environmental factors outlined in the December 2006 Interagency Policy Statement on the ALLL should remain relevant under CECL.
Agencies noted that the data financial institutions will need under CECL will depend on the methods institutions use to estimate credit losses, and they recommended internal discussions with lending, credit risk management, information technology and other functional areas (as well as with outside, core providers) on the availability of historical data.
“Depending on the estimation method or methods selected to implement CECL, institutions may need to capture additional data and retain data longer than they have in the past on loans and other financial assets that have been paid off or charged off,” the agencies said.
Consider available internal and external information that is relevant to assessing the collectability of cash flow, they recommended. Agencies won’t require banks and credit unions to reconstruct or obtain data from previous periods if it’s not available without “undue cost and effort,” however, some institutions may decide it will help them more effectively implement CECL to obtain the data, according to the FAQs.
“An institution may find that certain data from previous periods relevant to its determination of its historical lifetime loss experience are not available or no longer accessible in the institution’s loan system or from other sources,” the agencies wrote. “The institution should promptly begin to capture and maintain such data on a go-forward basis so it can build up a more complete set of relevant historical loss data by the effective date of the new credit losses standard or as soon thereafter as practicable.”