Expectations for ALLL
As written in the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses, “Allowance estimates should be based on a comprehensive, well-documented, and consistently applied analysis of the loan portfolio.”
When calculating the ALLL either quarterly or monthly, methodological consistency is an expectation. Institutions must not vary greatly in their approach for risk of skewing results. Examiners expect a repeatable and accurate calculation, and require directional consistency to ensure the methodology is accurate over time.
The calculation should be objective in nature. Any changes must be well-documented and justified. Any alterations to the calculation should be transparent and readily available for review.
Expectations for ALLL
Large SEC Filers Begin Reporting CECL’s Impact
CECL’s impact on a financial institution is all about the portfolio makeup. That’s the main message from the first financial institutions to report officially on the effects of adopting the current expected credit loss model.
The top CECL changes to ALLL disclosures
The current expected credit loss (CECL) model requires financial institutions to overhaul many aspects of their accounting for the allowance for loan and lease losses (ALLL), including disclosures. Here are five top CECL modifications expected for ALLL disclosures.
The ALLL calculation should be objective in nature; that is, when attributing qualitative and environmental factors to the allowance, there should be sound reasoning as to why certain adjustments were made. An objective ALLL ensures that there is no management bias or partiality to skew the results of the calculation one way or another.
Institutions must perform the ALLL calculation in such a manner that the assumptions from one period to the next are justified and consistent. From calculation to calculation, assumptions should reflect any changes in the loan portfolio, management adjustments be directionally consistent with the environmental landscape and the methodology should be largely repeatable.
It is imperative that outside parties understand an institution’s ALLL methodology. Those that examine the methodology must be able to see the various components of the calculation and all assumptions that go into it.