Compliance Guide

BankNews.com

Poll: Historical Loss Rates Most Applicable Method for C&I Pools

February 24 – A survey of lenders about current loss rate methods for calculating the provision for commercial and industrial (C&I) pools as part of the Allowance for Loan and Lease Losses found more than two-thirds consider historical loss rates the most applicable method for C&I pools. An additional 23 percent said that migration analysis is the most applicable.

Sageworks, a financial information company that provides lending, credit risk and portfolio risk solutions to banks and credit unions, conducted the poll during a Feb. 9 webinar, C&I Pool CECL Methodologies, which is part of the ongoing CECL Methodology Webinar Series.

The poll asked webinar attendees which loss rate method they find most applicable for their C&I pools. In preparation for the expected loss model in the allowance, institutions are evaluating their existing data aggregation policies to assess how those plans may need to change to accommodate expected loss calculations for each pool.

According to the 337 responses from the webinar, only five percent said vintage analysis was the loss rate method they find most applicable.

“It’s no surprise that a majority of institutions are utilizing a historical loss rate method, which is calculated by dividing average annual losses by average balance. This method is a good approach to accommodating current GAAP,” said Neekis Hammond, a principal with Sageworks Advisory Services and the presenter from the webinar. “However, there is little use for this methodology under the new standard (Topic 326/‘CECL’). The new standard does not require, nor allow, institutions to record reserves on loans that do not exist or will originate in the future. Yet, the numerator in this calculation does just that; it is impossible to determine if the losses are associated to loans that existed as of any particular point-in-time. Additionally, this approach can have the inverse effect of driving down loss experience by including future exposure in the denominator, thus understating loss experience relative to existing loans.”

The inclusion of a historical loss example has led to some confusion, such as historical loss under CECL being indicative of a buildup of annual historical loss rates rather than a specific portfolio’s cumulative loss experience, explains Hammond. “A majority, 68%, according to this poll will find it difficult to justify reserve levels using the average annual loss rate approach under future GAAP. Institutions using the other methods will need to dramatically change the logic inherent in their models to accommodate a lifetime loss observation, which is very different than a ‘look-back period’.”

The webinar was led by Neekis Hammond and Garver Moore, both principals with Sageworks Advisory Services. During the session, attendees saw CECL calculations performed on C&I loan pools, including positives and negatives of using different methodologies. Attendees also learned more about segmentation options for C&I portfolios and the challenges that banks may have managing data for C&I calculations under the CECL standard. The next session in the CECL Webinar Series will cover forecasting and will be held on March 9 at 2pm ET. Registration is now open.

Print Friendly
Share This PageShare on FacebookShare on Google+Tweet about this on TwitterShare on LinkedIn
Kryptronic Internet Software Solutions