Re: Proposed Interagency Guidance on Credit Risk Review Systems
Robert E. Feldman
Executive Secretary,
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Ann E. Misback
Secretary,
Board of Governors of the Federal Reserve System
20th Street and Constitution Ave, N.W.
Washington, D.C. 20551
Chief Counsel’s Office
Attn: Comment Processing
Office of the Comptroller of the Currency
400 7th Street, S.W.
Washington, D.C. 20219
Gerald Poliquin
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
Ladies and Gentlemen:
The American Bankers Association (ABA) appreciates the opportunity to comment on the banking agencies’ (Agencies) proposed guidance for credit risk review systems. The proposed guidance discusses sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution’s loan review portfolio to its management and board of directors.
As described in the preamble, the Agencies are proposing to issue guidance on credit risk review systems, separating such guidance from the Interagency Policy Statement on the Allowance for Loan and Lease Losses (ALLL) (2006 attachment 1). In creating a stand-alone document, the Agencies intend to update that guidance to reflect current practice and methodology, and still align with the Interagency Guidelines Establishing Standards for Safety and Soundness (Guidelines, or Guidance), which sets out safety and soundness standards for bank credit risk reviews and communication to management regarding loan portfolio performance. The proposed guidance means to outline applicable principles for institutions of all sizes regarding effective credit risk review systems.
ABA wants to thank the Agencies for their efforts to put forward a comprehensive proposed guidance. Most of the proposed changes are common practices already established by our members and recognized as part of a sound credit risk system. We note, however, that the proposed Guidance advances new requirements that must be further considered for Credit Risk Review Systems. Several proposed changes are either too broad or overly prescriptive to implement effectively. We discuss those elements below, noting that such proposals would be too arduous, excessive of management or supervisory value, for all banks, but especially onerous for smaller institutions. Some of these proposed changes create an overly operose layer of additional time and quantitative analysis for credit management, independent loan review, credit analysis, and at times excessive review by the board of directors.
The Agencies’ issuance solicits responses to several questions:
To what extent is the proposed credit review guidance appropriate for institutions of all asset sizes? What elements should be added or removed for institutions of differing asset sizes, and why? To what extent does the approach described for small and rural institutions with fewer resources and employees provide for an appropriate degree of independence in the credit risk review function? What if any modifications should the agencies consider and why?
Our comments address these questions by offering views and analyses of the specific principles and practices set forth in the proposed Guidelines. Overall, ABA believes that careful tailoring of regulatory guidance to the risk profile and business model is critical for regulatory oversight. The final Guidance needs to define robust credit risk review standards that allow for flexibility for banks with less complex loans and those that do not pose a threat to the safety and soundness of the institution. Moreover, the scope and depth of the independent credit risk review proposals set forth herein will significantly change the scope of the current standards and may replicate other areas of audit. We recognize that the Agencies are looking to adopt much of the methodology of Current Expected Credit Loss standards (CECL) into the credit risk rating systems of the proposed Guidance. We caution, however, that adopting CECL standards into credit risk ratings creates a complex methodology that many banks may be unable to implement effectively. Below, we describe the challenges banks will face with various portions of the proposed rule, and we note numerous burdens that are specific to small institutions.
Additionally, the current and proposed Guidance do not adequately differentiate between different product types and exposures, including significant differences between commercial and retail loans. For example, several of the proposed standards continue to refer to a manual review of individual loans to assign and validate risk ratings, which would not only be impractical for a large portfolio of smaller retail loans but is also misaligned to the agencies’ Uniform Retail Classification and Account Management Policy.2 The Guidance should be revised to provide appropriate flexibility and more clearly differentiate standards for retail versus commercial portfolios.