Premier began providing consulting and analytical services related to loss forecasting and the new FSAB accounting standard in 2017. The new Current Expected Credit Losses (CECL) standard requires institutions to transition from the traditional incurred loss approach to one that requires a life-of-loan perspective which recognizes the entire potential losses inherent in the loan portfolio. One of the key points in forecasting losses are the “qualitative” factors used by institutions – how they derived, quantified, and ultimately justified. This is over-simplification, but these seemingly simplistic changes are much more impactful than they may seem (and largely misunderstood).
Even if the move to the more forward-looking, expected loss approach were not required as part of the new standard, the incurred loss approach would not be viable today. The rapidly changing and increasingly turbulent environment has fostered an ever-moving target with respect to forecasting losses. There remains a great deal of uncertainty with respect to the pandemic and fiscal and monetary policy. This uncertainty, combined with cultural shifts and changes in technology that can impact entire industries literally overnight, produced unprecedented volatility.
The result? Static models and approaches are no longer relevant. Institutions need dynamic solutions where adjustments can be made quickly along with the ability to assess multiple possibilities.
In short, banks will need, at a minimum, supplemental approaches to deal with a rapidly changing world. Premier is dedicated to continuing to enhance models designed to fit individual lenders as well as quantify the impact of the economic environment.
We welcome the opportunity to discuss how we can assist you.