The FDIC Supervisory Insights, published by the FDIC’s Division of Risk Management Supervision, Winter 2017 edition contained some important information regarding credit quality and loan asset management.
The first article, “Credit Management Information Systems: A Forward-Looking Approach” – PDF, illustrates how banks can strengthen credit MIS by incorporating forward-looking risk indicators and establishing a sound governance framework. The article provides some guidance as it provides a hypothetical comparison of two institutions’ credit management approach and their respective consequences.
The second, “Underwriting Trends and Other Highlights from the FDIC’s Credit and Consumer Products/Services Survey” – PDF, shares recent Credit Survey results with a focus on lending activity — including trends in underwriting, loan growth, and funding. The results suggest that credit risk and liquidity risk are increasing, as reflected in a higher frequency of surveys that report risks associated with loan growth, out-of-territory lending, and credit and funding concentrations.
This issue also includes the Regulatory and Supervisory Roundup, an overview of recently released regulations and supervisory guidance.
Although not directly addressed in the guidance, the articles above have some relevance regarding the new CECL requirements to be implemented in the near future. The FDIC released a summary in the third quarter of last year, and is as follows and applies to all institutions:
- The Financial Accounting Standards Board published its new credit losses accounting standard in June 2016.
- CECL applies to all financial assets carried at amortized cost (including loans held for investment and held-to-maturity debt securities), a lessor’s net investments in leases, and certain off-balance-sheet credit exposures such as loan commitments and standby letters of credit.
- Although CECL does not apply to available-for-sale debt securities, the new standard modifies the existing accounting for impairment on such securities.
- The new FAQs in the attached combined set of questions and answers address such topics as qualitative factors, data to implement CECL, purchased credit-deteriorated assets, the evaluation of the public business entity criteria, the mechanics of adopting the standard for Call Report purposes, and collateral-dependent loans.
- The FAQs continue to emphasize that CECL is scalable to institutions of all sizes; community institutions are not expected to need to adopt complex modeling techniques to implement the new accounting standard. Further, institutions are not required to engage third-party service providers to assist management in estimating credit loss allowances under CECL.
- The agencies encourage institutions to plan and prepare for the transition to and implementation of the new accounting standard, particularly with respect to determining the estimation method or methods to be used and collecting and maintaining relevant data to implement each selected method.
- The agencies expect institutions to make good faith efforts to implement the new accounting standard in a sound and reasonable manner.
- Institutions with questions about the new accounting standard and the FAQs may submit them by e-mail to CECL@fdic.gov.
There is also a FAQ associated with the upcoming CECL requirements which is available here:
https://www.fdic.gov/news/news/financial/2017/fil17041a.pdf