Comprehensive
"Historical Analysis"
of Risk Experience
Primary Objective of CECL:
To have a sufficiently precise level of reserves so as not to need replacement provisions at time of loss.
"Experience Based" Reporting
Virtually the entirety of the CECL Methodology is “Experienced Based”
That is to say, based upon each bank’s actual Loss Experience
The only way to do that is to thoroughly & effectively
Measure & Assess all of the Bank’s Historical Losses
***This is strictly Dictated by the CECL Guidance***
Therefore, the challenge is to turn Raw Historical Data into meaningful
Analytical Tools and Processes
That is to say, based upon each bank’s actual Loss Experience
The only way to do that is to thoroughly & effectively
Measure & Assess all of the Bank’s Historical Losses
***This is strictly Dictated by the CECL Guidance***
Therefore, the challenge is to turn Raw Historical Data into meaningful
Analytical Tools and Processes
Loss Analysis & Assessment
- Clearly Identified Risk Pools
- Risk Elements Segregated by
Discernible Risk Characteristics - "Statistical Significance" becomes a
Critical Issue in Constructing Risk Pools
"Day One" Reserve assessment of Each Risk Element
Critically Important
(Perhaps the most provocative CECL concept, but generally misunderstood.)
(Perhaps the most provocative CECL concept, but generally misunderstood.)
This provision does not require a precise "prediction" of future loss, rather...
It requires a "statistical assessment" of loss potential, given observed loss experience with similar Risk Assets.
It requires a "statistical assessment" of loss potential, given observed loss experience with similar Risk Assets.
Specific Objectives of Analysis
Discern:
- Probability of Loss
- Economic Impact of Loss
- Time-Frame of Remaining Exposure
