Feds Ask Foresight From Banks on Reserves

Banks and thrifts are expected to look ahead in estimating the performance of their mortgage portfolios in determining the proper level of loan-loss reserves, according to a new policy statement by the federal banking agencies.Historical loss rates and recent credit trends are not sufficient in setting allowances for loan and lease losses, according to the interagency policy statement. "Management should also consider those qualitative or environmental factors that are likely to cause estimated credit losses associated with an institution's existing portfolio to differ from historical loss experience," the policy statement said. In documenting adjustments in historical loss experience, banks can cite relevant articles in newspapers and other publications, as well as notes from discussions with borrowers. "At this stage of the credit cycle, it is critical that reserves be maintained in a prudent and well-documented manner, and the policy statement will help us meet those objectives," Comptroller of the Currency John Dugan said.