“Ask the Fed” Accounting Roundtable 2023: Key Takeaways

On November 13^th, the Federal Reserve Bank of St. Louis held the 2023 “Ask the Fed” Accounting Roundtable, which gave participants the opportunity to engage with policy makers and enhance communication between regulators and industry professionals. Below is a summary of program highlights.

Key Takeaways

Current Expected Credit Losses (CECL) Adoption

• Adoption among community banking organizations was somewhat muted. Examiners attributed this to a more conservative historical approach under the incurred loss model.
• Information provided for increases and decreases were consistent with Wolf’s look at “A Review of CECL Adoption by the Numbers.”

Examination Objectives

• Overall, the examination effort is to ensure that management made a good faith effort to implement CECL. Following are some of the considerations they will evaluate:
  • Is the methodology acceptable?
  • Is the level of allowance for credit losses (ACL) adequate?
• They re-iterated their previous guidance from SR Letter 20-12, stating that, “Examiners generally should accept an institution’s ACL estimates and not seek adjustments to the ACLs, when management has provided adequate support of the loss estimation process employed, and the ACL balances and assumptions used in the ACL estimates are in accordance with GAAP and regulatory reporting requirements.”

Initial Examination Observations

(Note: Only 34 exam reports have been issued by the Federal Reserve reflecting post-CECL implementation.)

• Need to update policies and procedures
• Application of CECL to unfunded commitments and held-to-maturity (HTM) securities
• Qualitative factors not fully supported or documented
• Lack of understanding of key inputs in vendor products

The Fed Offers Best Practices for Banks to Consider:

• Develop an effective challenge process
• Enhance documentation on the Bank’s methodology and the tools being used
• Document management’s decision making processes, including:
  • Identification of all inputs to ACL calculation
  • Outline data needed and its source
  • Document rationale for using/not using default settings and assumptions

Other areas discussed:

• Elimination of troubled debt restructuring (TDR) and related new loan modification disclosure requirements
• ACL relative to debt securities
• Other Financial Accounting Standards Board (FASB) projects that may impact financial institutions

Overall, the “Ask the Fed” Accounting Roundtable provided some valuable insight into the Fed’s perspective on CECL adoption trends, best practices related to implementation, and some insights into initial examination findings. Banks should ensure their documentation addresses key points provided throughout. Banks were also encouraged to direct questions through the Fed’s website.

Whether it’s CECL adoption, internal audits, regulatory compliance, or something else entirely, our financial institution team at Wolf is here to help – reach out if you have any questions.