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Held-to-Maturity (HTM) Debt Securities with No Expectation of Nonpayment

As a practical matter, institutions are not required to record an allowance on an HTM debt security for which expectation of nonpayment is zero (i.e., there is no expectation of nonpayment). The standard provides an example of one way an institution may estimate expected credit losses when the expectation of nonpayment is zero.

Indicators of zero loss for U.S. Treasury:

  • High credit rating
  • Long history with no credit losses
  • Explicitly fully guaranteed by a sovereign entity with high credit quality
  • Widely recognized as a “risk-free rate”
  • Can print its own currency
  • Currency is routinely held by central banks, used in international commerce, and commonly viewed as a reserve currency

 Indicator of loss > $0 for U.S. Treasury:

  • Recent or probable downgrade

However, the standard states that these are not the only instruments for which an institution could have such an expectation. For example, an institution may also conclude that the expectation of nonpayment is zero for financial instruments that are explicitly or implicitly guaranteed by the U.S. Government (e.g., Ginnie Mae, Fannie Mae, Freddie Mac).