Allowance for Loan and Lease Losses (ALLL)

In December 2012, The Financial Accounting Standards Board approved plans to proceed with changes to banking estimates of ALLL and Other Than Temporary Impairment of debt securities (OTTI). Called the Current Expected Credit Loss impairment Model (CECL), FASB will require “life of loan” (LOL) estimates of losses on loans and debt securities.

ABA Position

ABA is concerned that the CECL model would present significant problems for banks and in a Jan. 24, 2014 letter called on FASB to initiate Roundtable Discussions between bankers, bank investors, regulators, and auditors before a final standard is issued.

In June 2014, FASB then held private workshops with bankers, ABA personnel, auditors, and regulators present.  ABA then sent another letter to FASB in January 2015 to follow up on existing issues still outstanding and to call for additional workshops.

ABA expects FASB to issue the final standard in 2015, with an anticipated effective date no earlier than 2018.

ABA believes a final standard on impairment should:

  • Reflect a bank’s estimate of all losses that currently reside in the loan portfolio.
  • Retain a level of reliability critical to financial reporting integrity and required by banking regulators, and
  • Be operational to implement and audit, building on current credit loss estimation systems and not requiring wholesale changes to them.
  • Acknowledge the difference between loans and debt securities – the current OTTI process does not need change.
View a Powerpoint on the issue.
View the ABA Discussion Paper CECL Implementation Challenges: The Life of Loan Concept (Updated April 2015)

ABA Analysis

The CECL model will require LOL estimates of losses to be recorded for unimpaired loans at origination or purchase. However, if finalized as currently proposed, the LOL loss concept will present significant problems to bankers:
  • Wholesale changes to ALLL and OTTI estimation systems will be required.
    • Systems that rely on annualized charge-off rates will be insufficient.
    • Current credit metrics, such as delinquency, will have little relevance to the ALLL balance.
    • Vintage analysis will likely be required across all portfolios in order to support LOL evaluation of losses.
  • Forecasts far into the future are required
    • The decrease in reliability will result in volatility and a new buffer that will be needed in managing capital.
  • Losses that are possible several years in the future will be recorded, while the interest earned in the meantime is not.
    • Banks offering long-term products will experience a strain in capital.

Questions? For more information, contact Mike Gullette, (202) 663-4986.


 ABA Staff Contact

  • Mike Gullette, Vice President, Accounting and Financial Management