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Financial Institution Letters


July 25, 2001

SUBJECT: Interagency Policy Statement on Allowance for Loan and Lease Losses (ALLL)
Methodologies and Documentation for Banks and Savings Associations

The Federal Deposit Insurance Corporation (FDIC) and the other federal banking agencies, under the auspices of the Federal Financial Institutions Examination Council (FFIEC), have jointly issued the attached Policy Statement on Allowance for Loan and Lease Losses (ALLL) Methodologies and Documentation for Banks and Savings Institutions.

The policy statement, which was developed in consultation with Securities and Exchange Commission (SEC) staff, was issued by the FFIEC in proposed form on September 7, 2000, and has been revised in response to the comments received. It 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.

In addition to the guidance on ALLL methodologies and documentation, the policy statement includes illustrations of implementation practices that institutions may find useful for enhancing their own ALLL processes. It also contains 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, however, change existing accounting guidance in, or modify the documentation requirements of, GAAP or guidance provided in the relevant joint interagency statements nor does it alter the consultation provisions between the SEC and the banking agencies set forth in Section 241 of the Gramm-Leach-Bliley Act. 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.

This guidance applies equally to all institutions, regardless of their size. However, it states that institutions with less complex lending activities and products, such as many small banks, may find it more efficient to combine a number of procedures while continuing to ensure the institution has a consistent and appropriate methodology. Thus, much of the supporting documentation required for an institution with more complex products or portfolios may be combined into fewer supporting documents in an institution with less complex products or portfolios.

The policy statement was published in the July 6, 2001, Federal Register on pages 35629-35639. Attached is a reformatted version of the Federal Register notice.

On July 6, 2001, the SEC staff issued parallel guidance on loan loss methodologies and documentation that should be observed by public companies subject to the federal securities laws through its Staff Accounting Bulletin 102. A copy of the SEC's document can be obtained at

Please share this information with the appropriate personnel in your institution. For more information, please contact the regional accountant in your FDIC regional office.

Michael J. Zamorski
Acting Director

Attachment: July 6, 2001, Federal Register, pages 35629-35639
HTML or PDF (88 KB File - PDF Help or Hard Copy)

Distribution: FDIC-Supervised Banks (Commercial and Savings)

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200).

Last Updated 07/25/2001

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