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experience, including real estate loans for certain periods at
issue. Management judgment also was applied to evaluate whether
past experience was likely to be an effective guide to future
loss experience for commercial loans in light of changes in
procedures or underwriting standards.
The CRESCO loss reserve factors were not determined with a
view toward using those factors for valuation purposes or in
calculating a credit adjustment. The CRESCO loss reserve factors
were used by FNBC in assessing the adequacy of its loan loss
reserves. Loan loss reserves were the amounts set aside for
credit losses that FNBC incurred in the ordinary course of
business. FNBC’s allowance for loan loss reserves contained no
specific accrual for swap credit risks.
c. Accuracy of CRESCO Loss Factors
In August 1992, CRESCO adopted the following loss reserve
factors for non-real-estate transactions (e.g., a swap):
Risk rating Reserve Factor
1 0.00%
2 0.05
3 0.25
4 0.45
5 1.60
Before that time, the loss reserve factors for non-real-estate
transactions were:
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