To address conflicts over role of ALLL, federal banking agencies look to management's methodology

The federal banking regulatory agencies provided a new policy statement on establishing an allowance for loan and lease losses that is consistent with both generally accepted accounting principles and banking supervisory guidance. In a joint release at the end of 2006, the new policy statement, issued December 13, 2006, replaces a 1993 policy statement and is intended to address the dilemma faced by banks and thrifts of accurately measuring and reporting the verifiable impairment of their loan portfolio, while preparing in a prudent manner for borrowers' possible future difficulties. The new policy statement attempts to strike a balance by recognizing and reconfirming the proper role of management judgment when that judgment is exercised within the bounds of a comprehensive, systematic, and consistently applied program of loan review. The issuance of this policy statement was timely, since it came when lenders that have enjoyed several years of unusually strong credit conditions across many areas of lending encountered difficulties in some areas, such as subprime mortgage lending.