Blog

Since the height of the recent financial crisis, allowance for loan and lease loss levels have fallen by over 50 percent. The bulk of defaulting subprime mortgages have since been charged off and credit quality has experienced a steady rise, resulting in lower levels needed to cover expected bad debts. This article summarizes the trends we've seen over the past five years.

FASB member, Hal Schroeder, discusses how the FASB's new CECL model will help to align accounting rules to more accurately reflect how investors view the inherent credit risks of lending. He cites 2006 ALLL levels as a low point only seen twice prior in the preceding 70 years, and indicates these levels were more a shortcoming of US GAAP than any intentional misrepresentation of credit risk by banks.

The FDIC offers a resource for TDRs in the form of Tabletop Exercises. The document provides examples of loans which should be assigned a TDR status, an explanation of why such loans should be classified as TDRs, and offers examples of how to measure impairment. As TDRs can often be an area of confusion for bankers in the ALLL, this document may be helpful to review and ensure you are in line with guidance.

There is a strong correlation between comprehensiveness of portfolio analysis and the accuracy of the output. This is compared to the experience of inspecting one's future home - the more granular and comprehensive the inspection, the more informed you are about the associated costs you need to set aside for repairs. Just as a thorough home inspection will provide a more accurate repair budget, migration analysis will produce a more comprehensive analysis of your loss history and reserve requirements.

ALLL.com is meant to provide you with insight into the ALLL calculation, including feedback from your peers through the Peer Discussions section as well as the polls distributed throughout the site. As we reach the site's two month mark, we wanted to share with you peer feedback aggregated from these polls. This article displays institutions' stances on M&A, content valued, and challenges with respect to the quantitative and qualitative components of the ALLL calculation.

Open to all financial institution professionals, the 2015 Bank & Credit Union Examination Survey focuses on the federal exam experience. The survey asks which areas of federal oversight received the most criticism for an individual institution, in hopes of better understanding how banks and credit unions in the U.S. are faring during their regular examinations. All responses are anonymous and confidential and will be complied into a comprehensive report. Your participation, expected to take 10-15 minutes, will grant you access to the results upon completion of the survey.

Expected to be released in 2015, the FASB's CECL model is a point of uncertainty for many institutions. We do not yet know the exact requirements of CECL; however, the information we do know about the model warrants that institutions start preparing and planning for these nearing changes now. This CECL prep kit equips financial professionals with resources regarding the new model: whitepapers, webinars and infographics covering the key components of the new standard.

If you're curious how your ALLL stacks up to those of your peers, McGladrey issued a survey that may provide you with some insight. Its 10th annual "National Loan Loss Reserve Survey" provides an overview of the average ending figures for banks with respect to total reserve, unallocated reserve, ASC 450-20 (FAS 5), ASC 310-10-35 (FAS 114) and various other components of the ALLL calculation.

Assessing credit risk comprises many components. Many of the fundamental principles will remain unchanged upon the release of FASB's CECL model; however, accounting for expected credit losses will introduce new policies and procedures into financial institutions' methodology for assessing credit risk and allowance levels.

When an institution’s ALLL makes headlines, it’s usually not for being sound and defensible. The case of First Niagara Financial Group Inc. proves to be no different. In February 2015, the bank fired a mid-level employee for having overstated allowance figures dating back to the middle of 2013.

This is an overview of the Basel Committee's document highlighting expectations associated with the transition to accounting for expected credit losses. The objective of the document is to “set out supervisory requirements on sound credit risk practices associated with the implementation and ongoing applications of expected credit loss (ECL) accounting models.” This article provides an overview of the document and a "sneak preview" of what bankers should expect in their transition to an expected loss model.

In calculating the ALLL, often one of most cumbersome components of the process proves to be the ASC 310-10-35 (FAS 114) impairment analysis.