The banking agencies have issued new supervisory guidance on the amount banks must hold in their allowance for loan and lease losses (ALLL) related to second liens on single-family housing, noting that the principles in the guidance should also apply to all credit risk. Although couched as a restatement of prior guidance, the new standards in fact are aimed at forcing banks to reserve against second liens that, while performing, are associated with underlying senior liens that may become delinquent or could be modified, taking into account the combined loan-to-value (CLTV) ratio of the first and second liens in making these judgments.

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