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Basel Issues Guidance for CECL Accounting

December 22, 2015
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The Basel Committee for Banking Supervision has released a December 2015 document setting out supervisory guidance on “sound credit risk practices associated with the implementation and ongoing application of expected credit loss accounting frameworks.” The guidance, which according to Basel, “should be viewed as complementary to the accounting standards,” lays out 11 principles for how banks and their regulators should be monitoring credit risk and expected credit losses, as follows:

Principle 1: A bank’s board of directors (or equivalent) and senior management are responsible for ensuring that the bank has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances in accordance with the bank’s stated policies and procedures, the applicable accounting framework and relevant supervisory guidance.

Principle 2: A bank should adopt, document and adhere to sound methodologies that address policies, procedures and controls for assessing and measuring credit risk on all lending exposures. The measurement of allowances should build upon those robust methodologies and result in the appropriate and timely recognition of expected credit losses in accordance with the applicable accounting framework.

Principle 3: A bank should have a credit risk rating process in place to appropriately group lending exposures on the basis of shared credit risk characteristics.

Principle 4: A bank’s aggregate amount of allowances, regardless of whether allowance components are determined on a collective or an individual basis, should be adequate and consistent with the objectives of the applicable accounting framework.

Principle 5: A bank should have policies and procedures in place to appropriately validate models used to assess and measure expected credit losses.

Principle 6: A bank’s use of experienced credit judgment, especially in the robust consideration of reasonable and supportable forward-looking information, including macroeconomic factors, is essential to the assessment and measurement of expected credit losses.

Principle 7: A bank should have a sound credit risk assessment and measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk and to account for expected credit losses.

Principle 8: A bank’s public disclosures should promote transparency and comparability by providing timely, relevant and decision-useful information.

Principle 9: Banking supervisors should periodically evaluate the effectiveness of a bank’s credit risk practices.

Principle 10: Banking supervisors should be satisfied that the methods employed by a bank to determine accounting allowances lead to an appropriate measurement of expected credit losses in accordance with the applicable accounting framework.

Principle 11: Banking supervisors should consider a bank’s credit risk practices when assessing a bank’s capital adequacy.

While we await official confirmation of CECL and subsequent guidelines from FASB, the Basel committee release gives insights on how stringent regulators might be in examining compliance with the coming accounting standard.

More related reading:

ABA Press Release on the Basel Committee for Banking December 2015 release

Basel Press Release

Basel Brief Summary of Guidance

Basel Full Guidance

About the Basel Committee

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