33278 Federal Register / Vol. 85, No. 105 / Monday, June 1, 2020 / Notices
1 See OCC Bulletin 2006–47; FDIC Financial
Institution Letter FIL–105–2006; Federal Reserve
Supervision and Regulation (SR) letter 06–17;
NCUA Accounting Bulletin No. 06–01.
2 12 CFR part 30, appendix A (OCC); 12 CFR part
208, appendix D–1 (Board); 12 CFR part 364
appendix A (FDIC). Also see 12 CFR part 723
(NCUA).
3 Interagency Guidance on Credit Risk Review
Systems, 84 FR 55679 (Oct. 17, 2019).
4 See Financial Accounting Standards Board’s,
Accounting Standards Codification Topic 326,
which revises the accounting for the allowances for
credit losses (ACLs) and introduces the CECL
methodology. [The agencies’ final guidance on
CECL is contained in a separate document
published elsewhere in this issue of the Federal
Register.]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket ID OCC–2019–0018]
FEDERAL RESERVE SYSTEM
[Docket ID OP–1679]
FEDERAL DEPOSIT INSURANCE
CORPORATION
RIN 3064–ZA09
NATIONAL CREDIT UNION
ADMINISTRATION
RIN 3133–AF05
Interagency Guidance on Credit Risk
Review Systems
AGENCY: Office of the Comptroller of the
Currency (OCC), Treasury; Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); and
National Credit Union Administration
(NCUA).
ACTION: Final guidance.
SUMMARY: The OCC, the Board, the
FDIC, and the NCUA (collectively, the
agencies) are issuing final guidance for
credit risk review (final guidance). This
guidance is relevant to all institutions
supervised by the agencies and replaces
Attachment 1 of the 2006 Interagency
Policy Statement on the Allowance for
Loan and Lease Losses. The final
guidance discusses sound management
of credit risk, a system of independent,
ongoing credit review, and appropriate
communication regarding the
performance of the institution’s loan
portfolio to its management and board
of directors.
DATES: The final guidance is available
on June 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: Beth Nalyvayko, Bank
Examiner, or Lou Ann Francis, Director,
Commercial Credit Risk, (202) 649–
6670; or Kevin Korzeniewski, Counsel,
Chief Counsel’s Office, (202) 649–5490.
For persons who are hearing impaired,
TTY, (202) 649–5597.
Board: Constance Horsley, Deputy
Associate Director, (202) 452–5239;
Kathryn Ballintine, Manager, (202) 452–
2555; or Carmen Holly, Lead Financial
Institution Policy Analyst (202) 973–
6122; or Alyssa O’Connor, Attorney,
Legal Division, (202) 452–3886, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Thomas F. Lyons, Chief, Policy
& Program Development, tlyons@
fdic.gov (202) 898–6850); George J.
Small, Senior Examination Specialist,
Risk Management Policy, gsmall@
fdic.gov (917) 320–2750, Risk
Management Supervision; Ann M.
Adams, Senior Examination Specialist,
Risk Management Policy, annadams@
fdic.gov (347) 751–2469, Risk
Management Supervision; or Andrew B.
Williams II, Counsel, andwilliams@
fdic.gov; (202) 898–3591), Supervision
and Legislation Branch, Legal Division,
Federal Deposit Insurance Corporation;
550 17th Street NW, Washington, DC
20429.
NCUA: Vincent H. Vieten, Senior
Credit Specialist (703) 518–6618; Uduak
Essien, Director (703) 518–6399,
Division of Credit Markets; or Ian
Marenna, Associate General Counsel
(703) 518–6554, Office of General
Counsel.
SUPPLEMENTARY INFORMATION:
I. Background
In 2006, the OCC, the Board, the
FDIC, and the NCUA (collectively
referred to as the agencies) issued the
Interagency Policy Statement on the
Allowance for Loan and Lease Losses.1
Attachment 1 of that statement, entitled
‘‘Loan Review Systems,’’ served as the
agencies’ guidance on credit risk review
(Attachment 1). Attachment 1
supplemented and aligned with other
relevant agency issuances on credit
review, including the Interagency
Guidelines Establishing Standards for
Safety and Soundness.2
In October 2019, the agencies invited
public comment on proposed guidance
on credit risk review (proposed
guidance or proposal).3 The proposed
guidance would update and clarify
Attachment 1. It also would adjust
terminology to be consistent with the
current expected credit losses (CECL)
methodology, a recent accounting
standards change.4 The agencies are
adopting the proposed guidance in final
form (final guidance), with certain
revisions as discussed below. The final
guidance replaces Attachment 1 as the
agencies’ guidance on credit risk review
systems for all supervised institutions
and is being issued as a standalone
document. Attachment 1 is rescinded as
of June 1, 2020.
II. Overview of Comments
The agencies collectively received 19
comments on the proposed guidance.
Commenters included trade
associations, banks, credit unions, and
members of the public.
Most commenters expressed general
support for the guidance. Commenters
noted that the proposed guidance
reflected sound practices and
principles, incorporated the core
elements of credit risk review, and did
not represent a fundamental shift from
Attachment 1. Some commenters raised
concerns including that the guidance
was too prescriptive.
The comments addressed a wide
range of topics, and in some instances,
commenters requested clarifications to
certain aspects of the proposed
guidance. For example, commenters
discussed the role of credit risk review
including its relation to other functions,
such as internal audit; the appropriate
scope, depth and frequency of credit
risk review activities; internal
responsibility for an institution’s risk
rating framework; the process for
adjudicating risk rating disputes; the
communication of credit risk review
results and qualifications of credit risk
review personnel; credit risk review in
the context of retail portfolios; and the
use of technology and data in credit risk
review.
A number of commenters expressed
concern with what they viewed as the
one-size-fits-all approach of the
proposed guidance and the potential
burden to smaller institutions.
Commenters requested that the agencies
specifically tailor the guidance to
emphasize flexibility based on an
institution’s risk profile or even exempt
small institutions from the guidance.
Some commenters discussed
independence of the credit risk review
function and acknowledged that credit
risk review provides a critical and
independent assurance role but noted
that role has expanded in scope and
may overlap with duties performed by
other functions resulting in a
duplication of efforts.
Commenters also expressed concern
generally with the implementation of
the CECL methodology; the relationship
of the proposed guidance to Allowances
for Credit Losses (ACL); and whether
CECL would make credit risk review
more burdensome, particularly for
smaller institutions.
VerDate Sep<11>2014 19:40 May 29, 2020 Jkt 250001 PO 00000 Frm 00200 Fmt 4703 Sfmt 4703 E:\FR\FM\01JNN1.SGM 01JNN1
jbell on DSKJLSW7X2PROD with NOTICES
1 See OCC Bulletin 2006–47; FDIC Financial
Institution Letter FIL–105–2006; Federal Reserve
Supervision and Regulation (SR) letter 06–17;
NCUA Accounting Bulletin No. 06–01.
2 12 CFR part 30, appendix A (OCC); 12 CFR part
208, appendix D–1 (Board); 12 CFR part 364
appendix A (FDIC). Also see 12 CFR part 723
(NCUA).
3 Interagency Guidance on Credit Risk Review
Systems, 84 FR 55679 (Oct. 17, 2019).
4 See Financial Accounting Standards Board’s,
Accounting Standards Codification Topic 326,
which revises the accounting for the allowances for
credit losses (ACLs) and introduces the CECL
methodology. [The agencies’ final guidance on
CECL is contained in a separate document
published elsewhere in this issue of the Federal
Register.]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket ID OCC–2019–0018]
FEDERAL RESERVE SYSTEM
[Docket ID OP–1679]
FEDERAL DEPOSIT INSURANCE
CORPORATION
RIN 3064–ZA09
NATIONAL CREDIT UNION
ADMINISTRATION
RIN 3133–AF05
Interagency Guidance on Credit Risk
Review Systems
AGENCY: Office of the Comptroller of the
Currency (OCC), Treasury; Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); and
National Credit Union Administration
(NCUA).
ACTION: Final guidance.
SUMMARY: The OCC, the Board, the
FDIC, and the NCUA (collectively, the
agencies) are issuing final guidance for
credit risk review (final guidance). This
guidance is relevant to all institutions
supervised by the agencies and replaces
Attachment 1 of the 2006 Interagency
Policy Statement on the Allowance for
Loan and Lease Losses. The final
guidance discusses sound management
of credit risk, a system of independent,
ongoing credit review, and appropriate
communication regarding the
performance of the institution’s loan
portfolio to its management and board
of directors.
DATES: The final guidance is available
on June 1, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: Beth Nalyvayko, Bank
Examiner, or Lou Ann Francis, Director,
Commercial Credit Risk, (202) 649–
6670; or Kevin Korzeniewski, Counsel,
Chief Counsel’s Office, (202) 649–5490.
For persons who are hearing impaired,
TTY, (202) 649–5597.
Board: Constance Horsley, Deputy
Associate Director, (202) 452–5239;
Kathryn Ballintine, Manager, (202) 452–
2555; or Carmen Holly, Lead Financial
Institution Policy Analyst (202) 973–
6122; or Alyssa O’Connor, Attorney,
Legal Division, (202) 452–3886, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Thomas F. Lyons, Chief, Policy
& Program Development, tlyons@
fdic.gov (202) 898–6850); George J.
Small, Senior Examination Specialist,
Risk Management Policy, gsmall@
fdic.gov (917) 320–2750, Risk
Management Supervision; Ann M.
Adams, Senior Examination Specialist,
Risk Management Policy, annadams@
fdic.gov (347) 751–2469, Risk
Management Supervision; or Andrew B.
Williams II, Counsel, andwilliams@
fdic.gov; (202) 898–3591), Supervision
and Legislation Branch, Legal Division,
Federal Deposit Insurance Corporation;
550 17th Street NW, Washington, DC
20429.
NCUA: Vincent H. Vieten, Senior
Credit Specialist (703) 518–6618; Uduak
Essien, Director (703) 518–6399,
Division of Credit Markets; or Ian
Marenna, Associate General Counsel
(703) 518–6554, Office of General
Counsel.
SUPPLEMENTARY INFORMATION:
I. Background
In 2006, the OCC, the Board, the
FDIC, and the NCUA (collectively
referred to as the agencies) issued the
Interagency Policy Statement on the
Allowance for Loan and Lease Losses.1
Attachment 1 of that statement, entitled
‘‘Loan Review Systems,’’ served as the
agencies’ guidance on credit risk review
(Attachment 1). Attachment 1
supplemented and aligned with other
relevant agency issuances on credit
review, including the Interagency
Guidelines Establishing Standards for
Safety and Soundness.2
In October 2019, the agencies invited
public comment on proposed guidance
on credit risk review (proposed
guidance or proposal).3 The proposed
guidance would update and clarify
Attachment 1. It also would adjust
terminology to be consistent with the
current expected credit losses (CECL)
methodology, a recent accounting
standards change.4 The agencies are
adopting the proposed guidance in final
form (final guidance), with certain
revisions as discussed below. The final
guidance replaces Attachment 1 as the
agencies’ guidance on credit risk review
systems for all supervised institutions
and is being issued as a standalone
document. Attachment 1 is rescinded as
of June 1, 2020.
II. Overview of Comments
The agencies collectively received 19
comments on the proposed guidance.
Commenters included trade
associations, banks, credit unions, and
members of the public.
Most commenters expressed general
support for the guidance. Commenters
noted that the proposed guidance
reflected sound practices and
principles, incorporated the core
elements of credit risk review, and did
not represent a fundamental shift from
Attachment 1. Some commenters raised
concerns including that the guidance
was too prescriptive.
The comments addressed a wide
range of topics, and in some instances,
commenters requested clarifications to
certain aspects of the proposed
guidance. For example, commenters
discussed the role of credit risk review
including its relation to other functions,
such as internal audit; the appropriate
scope, depth and frequency of credit
risk review activities; internal
responsibility for an institution’s risk
rating framework; the process for
adjudicating risk rating disputes; the
communication of credit risk review
results and qualifications of credit risk
review personnel; credit risk review in
the context of retail portfolios; and the
use of technology and data in credit risk
review.
A number of commenters expressed
concern with what they viewed as the
one-size-fits-all approach of the
proposed guidance and the potential
burden to smaller institutions.
Commenters requested that the agencies
specifically tailor the guidance to
emphasize flexibility based on an
institution’s risk profile or even exempt
small institutions from the guidance.
Some commenters discussed
independence of the credit risk review
function and acknowledged that credit
risk review provides a critical and
independent assurance role but noted
that role has expanded in scope and
may overlap with duties performed by
other functions resulting in a
duplication of efforts.
Commenters also expressed concern
generally with the implementation of
the CECL methodology; the relationship
of the proposed guidance to Allowances
for Credit Losses (ACL); and whether
CECL would make credit risk review
more burdensome, particularly for
smaller institutions.
VerDate Sep<11>2014 19:40 May 29, 2020 Jkt 250001 PO 00000 Frm 00200 Fmt 4703 Sfmt 4703 E:\FR\FM\01JNN1.SGM 01JNN1
jbell on DSKJLSW7X2PROD with NOTICES
33279Federal Register / Vol. 85, No. 105 / Monday, June 1, 2020 / Notices
5 Question 1: To what extent does the proposed
credit review guidance reflect current sound
practices for an institution’s credit risk review
activities? What elements should be added or
removed, and why? Question 2: To what extent is
the proposed credit review guidance appropriate for
institutions of all asset sizes? What elements should
be added or removed for institutions of differing in
sizes, and why? Question 3: What, if any, additional
factors should the agencies consider incorporating
into the guidance to help achieve a sufficient degree
of independence and why? To what extent does the
approach described for small or rural institutions
with fewer resources or employees provide for an
appropriate degree of independence in the credit
review function? What if any modifications should
the agencies consider and why?
6 Supra note 2.
7 See the Commercial and Member Business
Loans section of the NCUA Examiner’s Guide
(Commercial and Member Business Loans >
Commercial Loan Administration≤Independent
Loan Review).
8 Footnote 5 states that credit risk review may be
referred to as loan review, credit review, asset
quality review, or another name as chosen by an
institution. The role of, expectations for, and scope
of credit risk review as discussed in this document
are distinct from the roles, expectations, and scope
of work performed by other groups within an
institution that are also responsible for monitoring,
managing and reporting credit risk. Examples may
be those involved with lending functions,
independent risk management, loan work outs, and
accounting. Each institution indicates in its own
policies and procedures the specific roles and
responsibilities of these different groups, including
separation of duties. A credit risk review unit, or
individuals serving in that role, can rely on
information provided by other units in developing
its own independent assessment of credit risk in
loan portfolios, but the credit risk review unit
critically evaluates such information to maintain its
own view, as opposed to relying exclusively on
such information.
9 Footnote 4 states that the credit risk review
function is not intended to be performed by an
institution’s internal audit function. However, as
discussed in the agencies’ March 2003 Interagency
Policy Statement on the Internal Audit Function
and its Outsourcing (2003 policy statement), some
institutions coordinate the internal audit function
Continued
III. Discussion of Comments on the
Proposed Guidance
The agencies are finalizing the
guidance with targeted changes and
clarifications to address the concerns
raised by commenters. The comments,
and any revisions to the final guidance,
are discussed below and grouped based
on the three questions posed in the
proposal and other related topics raised
by commenters. The agencies’ three
questions asked whether the proposed
guidance reflected sound practices,
whether the proposed guidance was
appropriate for institutions of differing
sizes, and whether the agencies should
include additional factors in the
proposed guidance to help credit risk
review achieve a sufficient degree of
independence.5
The agencies emphasize that credit
risk review is a significant risk
management function separate from the
determination of the appropriate reserve
for credit losses. While the results of the
credit risk review can help ensure that
the ACLs or Allowance for Loan and
Lease Losses (ALLL) adequately reflects
risk in the institution’s loan portfolio,
the agencies are addressing the
implementation of CECL separately
from the final guidance.
A. General Application of Guidance
Some commenters indicated the
guidance was too prescriptive; in one
case, a commenter considered the
guidance excessively detailed and not
aligned with current practices for credit
unions in particular. Others indicated
that the proposed guidance reflected
foundational principles and outlined
elements of a sound credit risk program
without mandating how credit risk
review should operate. Commenters also
raised concerns that the proposed
guidance would be enforced as a
regulation.
An effective credit risk review
function is integral to the safe and
sound operation of every insured
depository institution. To assist
institutions in the creation and
operation of such functions, the
agencies have developed the final
guidance to describe a broad set of
practices and principles for developing
and maintaining a credit risk review
function consistent with safe and sound
credit risk management practices and
the Interagency Guidelines Establishing
Standards for Safety and Soundness.6
However, the final guidance does not
establish any requirements or rules, nor
does it mandate implementation of a
specific system or prescribe specific
actions with which institutions must
comply.
One commenter expressed general
concern about guidance being
applicable to all institutions, including
credit unions, because the commenter
considered credit union operational
practices as distinct from those of other
institutions. Another commenter called
for the guidance to address how it
intersects with the NCUA Examiner’s
Guide. The NCUA notes that credit risk
is related to the characteristics of the
loan, and not the type of institution
providing the financing. This guidance
is an appropriate reference to assist in
establishing a credit risk review
function for both credit union and other
institutions’ loan portfolios.
Furthermore, the final guidance aligns
with the NCUA Examiner’s Guide for
commercial loans 7 and 12 CFR part 723
of the NCUA’s regulations, and the
NCUA supports the recommendations
in this final guidance as it pertains to
retail and consumer loan portfolios. The
NCUA Examiner’s Guide will be
updated to reflect this new guidance.
B. Elements of the Guidance
Commenters addressed the role of
credit risk review; scope, depth, and
frequency of reviews; responsibility for
and determination of risk ratings; timely
communication of results; qualifications
of credit risk review personnel; tailoring
of the guidance to retail portfolios; and
use of technology in the credit risk
review process.
1. Role of Credit Risk Review
Some commenters called for the
guidance to better delineate between the
responsibilities of credit risk review and
other functions. As provided in footnote
5 8 of the final guidance, the role of
credit risk review is distinct from the
roles of other groups within an
institution that are also responsible for
monitoring, managing, and reporting
credit risk. The agencies reiterate that
institutions have flexibility to determine
the specific roles, responsibilities, and
duties of these different groups. The
core responsibilities of a credit risk
review system are discussed in the final
guidance under the objectives of an
effective credit risk review system, and
include the prompt identification of
loans with credit weaknesses and the
validation and adjustment of risk
ratings.
One commenter disagreed that a
primary objective of credit risk review
was to promptly identify all loans with
actual and potential credit weaknesses.
The commenter believed that this
responsibility primarily lies with the
credit administration function while
credit risk review would identify such
loans using a sample-based approach.
The guidance does not singularly assign
the process of risk identification to
credit risk review; effective ongoing
credit administration practices allow
other credit risk functions to have a role
in the prompt detection of changes in
loan quality and appropriate
adjustments to the risk rating. As part of
its independent risk rating validation
process, credit risk review may identify
loans with significant weaknesses and
identifiable losses and adjust the risk
rating accordingly. The emphasis for
credit risk review or any party
identifying credit risk is on timely and
accurate identification of credit
weaknesses so that action can be taken
to strengthen credit quality and
minimize loss.
Several commenters asked for
clarification of credit risk review’s role
in relation to internal audit. As
discussed in footnote 4 9 of the final
VerDate Sep<11>2014 19:40 May 29, 2020 Jkt 250001 PO 00000 Frm 00201 Fmt 4703 Sfmt 4703 E:\FR\FM\01JNN1.SGM 01JNN1
jbell on DSKJLSW7X2PROD with NOTICES
5 Question 1: To what extent does the proposed
credit review guidance reflect current sound
practices for an institution’s credit risk review
activities? What elements should be added or
removed, and why? Question 2: To what extent is
the proposed credit review guidance appropriate for
institutions of all asset sizes? What elements should
be added or removed for institutions of differing in
sizes, and why? Question 3: What, if any, additional
factors should the agencies consider incorporating
into the guidance to help achieve a sufficient degree
of independence and why? To what extent does the
approach described for small or rural institutions
with fewer resources or employees provide for an
appropriate degree of independence in the credit
review function? What if any modifications should
the agencies consider and why?
6 Supra note 2.
7 See the Commercial and Member Business
Loans section of the NCUA Examiner’s Guide
(Commercial and Member Business Loans >
Commercial Loan Administration≤Independent
Loan Review).
8 Footnote 5 states that credit risk review may be
referred to as loan review, credit review, asset
quality review, or another name as chosen by an
institution. The role of, expectations for, and scope
of credit risk review as discussed in this document
are distinct from the roles, expectations, and scope
of work performed by other groups within an
institution that are also responsible for monitoring,
managing and reporting credit risk. Examples may
be those involved with lending functions,
independent risk management, loan work outs, and
accounting. Each institution indicates in its own
policies and procedures the specific roles and
responsibilities of these different groups, including
separation of duties. A credit risk review unit, or
individuals serving in that role, can rely on
information provided by other units in developing
its own independent assessment of credit risk in
loan portfolios, but the credit risk review unit
critically evaluates such information to maintain its
own view, as opposed to relying exclusively on
such information.
9 Footnote 4 states that the credit risk review
function is not intended to be performed by an
institution’s internal audit function. However, as
discussed in the agencies’ March 2003 Interagency
Policy Statement on the Internal Audit Function
and its Outsourcing (2003 policy statement), some
institutions coordinate the internal audit function
Continued
III. Discussion of Comments on the
Proposed Guidance
The agencies are finalizing the
guidance with targeted changes and
clarifications to address the concerns
raised by commenters. The comments,
and any revisions to the final guidance,
are discussed below and grouped based
on the three questions posed in the
proposal and other related topics raised
by commenters. The agencies’ three
questions asked whether the proposed
guidance reflected sound practices,
whether the proposed guidance was
appropriate for institutions of differing
sizes, and whether the agencies should
include additional factors in the
proposed guidance to help credit risk
review achieve a sufficient degree of
independence.5
The agencies emphasize that credit
risk review is a significant risk
management function separate from the
determination of the appropriate reserve
for credit losses. While the results of the
credit risk review can help ensure that
the ACLs or Allowance for Loan and
Lease Losses (ALLL) adequately reflects
risk in the institution’s loan portfolio,
the agencies are addressing the
implementation of CECL separately
from the final guidance.
A. General Application of Guidance
Some commenters indicated the
guidance was too prescriptive; in one
case, a commenter considered the
guidance excessively detailed and not
aligned with current practices for credit
unions in particular. Others indicated
that the proposed guidance reflected
foundational principles and outlined
elements of a sound credit risk program
without mandating how credit risk
review should operate. Commenters also
raised concerns that the proposed
guidance would be enforced as a
regulation.
An effective credit risk review
function is integral to the safe and
sound operation of every insured
depository institution. To assist
institutions in the creation and
operation of such functions, the
agencies have developed the final
guidance to describe a broad set of
practices and principles for developing
and maintaining a credit risk review
function consistent with safe and sound
credit risk management practices and
the Interagency Guidelines Establishing
Standards for Safety and Soundness.6
However, the final guidance does not
establish any requirements or rules, nor
does it mandate implementation of a
specific system or prescribe specific
actions with which institutions must
comply.
One commenter expressed general
concern about guidance being
applicable to all institutions, including
credit unions, because the commenter
considered credit union operational
practices as distinct from those of other
institutions. Another commenter called
for the guidance to address how it
intersects with the NCUA Examiner’s
Guide. The NCUA notes that credit risk
is related to the characteristics of the
loan, and not the type of institution
providing the financing. This guidance
is an appropriate reference to assist in
establishing a credit risk review
function for both credit union and other
institutions’ loan portfolios.
Furthermore, the final guidance aligns
with the NCUA Examiner’s Guide for
commercial loans 7 and 12 CFR part 723
of the NCUA’s regulations, and the
NCUA supports the recommendations
in this final guidance as it pertains to
retail and consumer loan portfolios. The
NCUA Examiner’s Guide will be
updated to reflect this new guidance.
B. Elements of the Guidance
Commenters addressed the role of
credit risk review; scope, depth, and
frequency of reviews; responsibility for
and determination of risk ratings; timely
communication of results; qualifications
of credit risk review personnel; tailoring
of the guidance to retail portfolios; and
use of technology in the credit risk
review process.
1. Role of Credit Risk Review
Some commenters called for the
guidance to better delineate between the
responsibilities of credit risk review and
other functions. As provided in footnote
5 8 of the final guidance, the role of
credit risk review is distinct from the
roles of other groups within an
institution that are also responsible for
monitoring, managing, and reporting
credit risk. The agencies reiterate that
institutions have flexibility to determine
the specific roles, responsibilities, and
duties of these different groups. The
core responsibilities of a credit risk
review system are discussed in the final
guidance under the objectives of an
effective credit risk review system, and
include the prompt identification of
loans with credit weaknesses and the
validation and adjustment of risk
ratings.
One commenter disagreed that a
primary objective of credit risk review
was to promptly identify all loans with
actual and potential credit weaknesses.
The commenter believed that this
responsibility primarily lies with the
credit administration function while
credit risk review would identify such
loans using a sample-based approach.
The guidance does not singularly assign
the process of risk identification to
credit risk review; effective ongoing
credit administration practices allow
other credit risk functions to have a role
in the prompt detection of changes in
loan quality and appropriate
adjustments to the risk rating. As part of
its independent risk rating validation
process, credit risk review may identify
loans with significant weaknesses and
identifiable losses and adjust the risk
rating accordingly. The emphasis for
credit risk review or any party
identifying credit risk is on timely and
accurate identification of credit
weaknesses so that action can be taken
to strengthen credit quality and
minimize loss.
Several commenters asked for
clarification of credit risk review’s role
in relation to internal audit. As
discussed in footnote 4 9 of the final
VerDate Sep<11>2014 19:40 May 29, 2020 Jkt 250001 PO 00000 Frm 00201 Fmt 4703 Sfmt 4703 E:\FR\FM\01JNN1.SGM 01JNN1
jbell on DSKJLSW7X2PROD with NOTICES