For immediate release

The Federal Reserve today issued guidance to supervisors and bankers regarding a Financial Accounting Standards Board (FASB) staff article on loan-loss allowances. This guidance includes emerging points of agreement between the Securities and Exchange Commision and the Federal Reserve on loan-loss accounting matters. The Federal Reserve expects institutions to consider the FASB guidance in maintaining conservative loan-loss allowances, consistent with generally accepted accounting principles (GAAP). In this regard, banks may record their loan-loss allowances at the high end of the range of estimated losses when it reflects management's best estimate. Furthermore, determining the appropriate allowance involves a high degree of management judgment. And, allowances designated as unallocated are not inconsistent with GAAP, provided they reflect an estimate of inherent credit losses determined in accordance with GAAP. It is expected that recent accounting developments discussed in the FASB article will have a limited impact on the level of the banking industry's loan-loss allowances. As the federal banking agencies and Securities and Exchange Commission noted in a March 10 joint letter, "We recognize that today instability in global markets, for example, is likely to increase loss inherent in affected institutions' portfolios and consequently require higher allowances for credit losses than were appropriate in more stable times." Looking ahead, given the fundamental changes that have taken place in credit-risk management in recent years, a broader re- examination of accounting standards for loan loss allowances would appear beneficial. The Federal Reserve intends to play an active role in promoting and participating in such an effort to ensure that allowance levels remain conservative and prudent, consistent with safety and soundness considerations. The supervisory guidance letter is attached.

1999 Banking and consumer regulatory policy