Post on 09-Mar-2020
transcript
(ALLL)*
The views and opinions expressed are those of the presenter and are not necessarily those of the
Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System.
Allowance for Loan and Lease Losses
Key observations during the financial crisis
What are the current conditions out in the field
Key asset quality indicators
Exam related issues
Proposed changes to the ALLL
1
Key Observations During the Financial Crisis
◦ ALLL levels not commensurate with the overall risk in the portfolio
◦ Charge offs over a short compressed timeframe
◦ Provision requirements led to a significant erosion of capital and in some cases bank failures
2
What are the Current Conditions Out in the Field?
◦ Improving economic indicators leading to a reduction in past due and nonaccrual loans
◦ Charge offs have reduced significantly
◦ Minimal provision requirements and in some cases reverse provisions.
3
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2008Q2 2009Q2 2010Q2 2011Q2 2012Q2 2013Q2
Net
charg
e o
ffs/
Avera
ge L
oans
(%)
National Charge-off Ratio
Net charge offs/average loans
4 per. Mov. Avg. (Net charge offs/average loans)
Source: Bank Call Reports
4
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2008Q2 2009Q2 2010Q2 2011Q2 2012Q2 2013Q2
Nonperf
orm
ing A
ssets
/Tota
l Loans
+ O
REO
(%
)National Nonperforming Assets
Source: Bank Call Reports
5
$0
$1
$2
$3
$4
$5
$6
$7
$8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$Billions
Sixth District Net Charge-Offs
Annualized Net Charge-Offs
4Q Moving Average
Source: Bank Call Reports
6
0%
1%
2%
3%
4%
5%
6%
7%
$0
$2
$4
$6
$8
$10
$12
$14
$16
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Noncurre
nt L
oans/T
ota
l Loans
$ B
illions
Sixth District Noncurrent Loans
Noncurrent Loans
Noncurrent Loans/Total Loans (%)
Source: Bank Call Reports
7
0%
50%
100%
150%
200%
250%
300%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Covera
ge R
atio
:Loan L
oss R
ese
rves/N
oncurre
nt L
oansL
oan L
oss
Rese
rves/
Tota
l Loans
(%)
Sixth District Loan Loss Reserves
Loan Loss Reserves/Total loans (%)
Coverage Ratio
Source: Bank Call Reports
8
4.00
0.90
1.81
0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2005 2006 2007 2008 2009 2010 2011 2012 2013Q1 2013Q2
25th Percentile
Median
Reserves/ Nonaccrual Loans (X)
Source: Bank Call Reports
9
0.40
-0.10
-0.13
-0.52
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013Q12013Q2
25th percentile
Median
Building/Releasing Reserves
Source: Bank Call Reports
Perc
ent
Incre
ase
/ D
ecre
ase
in R
ese
rves
Building Reserves > 0%, Releasing Reserves < 0%
10
0%
50%
100%
150%
200%
250%
300%
350%
2010 2011 2012 2013
Me
dia
n V
alu
es
(%)
Sixth District CBG Median ALLL Coverage Trends
ALLL/Prior 4Q NCO Prior 4 Q Prov/ Prior 4 Q NCO ALLL/NA
ALLL/NA (Lowest Q) ALLL/NCO (Lowest Q) Prov/NCO (Lowest Q)
Source: Bank Call Reports
11
Exam Related Issues
◦ Loss periods need to transition back to normal time periods
◦ Support Unallocated portfolio
◦ Documentation
◦ Validation
12
Proposed Changes to Accounting for Credit Losses
◦ Reasons for change in accounting for credit losses
◦ Summary of proposed changes
◦ Improvements over existing model
13
Crisis led to calls for improvement in accounting for credit losses
In April 2009, G20 requested that standard setters “strengthen accounting recognition of loan-loss provisions...”
Weaknesses in current credit loss accounting model: ◦ Delayed recognition of credit losses until losses are
probable.
◦ Inability to factor in expectations of future conditions
14
What are the main provisions of the FASB model? ◦ Requires an estimate of losses expected over the
remaining life of a financial asset
Lifetime loss estimate now only used in FAS 114 and SOP 03-3
◦ Incorporate information about past events, current conditions, and reasonable and supportable forecasts of the future.
15
Will lead to early recognition of credit losses ◦ By recognizing credit losses expected over the life
rather than just losses that have been incurred as of the balance sheet date.
Will incorporate “reasonable and supportable” forecasts of the future.
Simple in concept but possibly not in application.
16
The proposal does not require the use of any specific method
The proposal will require data on historical lifetime loss experience that most banks may not have ◦ Will require banks to track new data
◦ May require new systems to track lifetime loss experience
17
◦ Regulators have pushed for long transition period
◦ Regulators have pushed for practical expedients to be allowed
◦ Regulatory guidance will be robust
◦ Regulators understand the challenge this will present to community banks.
18