Assessment of
"Specific" Potential Risks
Primary Objective of CECL:
To have a sufficiently precise level of reserves so as not to need replacement provisions at time of loss.
CECL Requires that all Reserve Computations are to be both:
"Experience Based" & "Forward Looking"
Presumes, or anticipates:
Sufficient data on prior Charge-Offs to be statistically predictive of
Future Loss Exposure or Probability
Presumes, or anticipates:
Sufficient data on prior Charge-Offs to be statistically predictive of
Future Loss Exposure or Probability
Experience Based
Based upon actual:
- Originations of Loans
- Current & Past Loan Volumes
- Charge-Offs
- Recoveries of Charge-Offs
Forward Looking
- Assessing Future Risk of Loss based upon Historical Evidence
- Also based upon Remaining Effective Life of each Risk Element
- Based upon Reasonable Elements of Future Economic Data
- Computed anew each Reporting Period (Monthly)
- Computational Methodology is Consistent throughout the Analyses
For Reserve Levels, sufficiency is not the standard; must be "justifiably accurate"
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 risks.
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 risks.
Total Losses
Statistical Significance
Implies that the Reliability of any Forecasted Outcome is essentially dependent on the Quantity and Quality of the Input Data. Otherwise, it may simply be the result of Random Chance.
- 100% Penetration
- Complete & Full Accountability
- Equals Call Report Losses
Statistical Significance
Implies that the Reliability of any Forecasted Outcome is essentially dependent on the Quantity and Quality of the Input Data. Otherwise, it may simply be the result of Random Chance.
Variables
Variables fall into two distinct classes:
Data - based exclusively on bank experience
(This should be determinate, with very few exceptions)
Discretionary Parameters - based solely upon Management's Determination
(This is established and amended by management, as appropriate)
Variables may be either Fixed or Dynamic
Data - based exclusively on bank experience
(This should be determinate, with very few exceptions)
Discretionary Parameters - based solely upon Management's Determination
(This is established and amended by management, as appropriate)
Variables may be either Fixed or Dynamic
Individual "Specific" Risk Elements
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Essentially Required:
Current Delinquencies
Loan Classifications Troubled Debt Restructuring Variable Rate Loan Risk Essentially Required if Available:
Historic Delinquencies
Credit Scoring (Consumer) Credit Standards (Commercial) PCD Assets (Purchased Assets with Credit Deterioration) Best Practices would include:
New Loan Officer Assessment
Change in Credit Standards Quality of the Bank's Credit Review Systems Other Risk Factors Management Assessment - Essentially Required
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*Remember, this is all to measure the "Risk of Loss,"
not identifying "Losses."
not identifying "Losses."