Loss Forecasting Retail and Commercial Portfolios for CECL

Cristian deRitis, Douglas W Dwyer

INTRODUCTION

The adoption of the CECL (current expected credit loss) accounting standard will have profound implications for credit providers. Banks and other lenders will need to adopt forward-looking methodologies in order to project lifetime loan losses and then add to their loss-allowance provisions based on these projections. This chapter discusses issues associated with implementing CECL on both retail and commercial portfolios. Some issues are specific to retail assets, others specific to commercial assets, while some are common to both.

The most relevant section for modelling credit losses comes from p. 3 of the CECL guidance provided by the Financial Accounting Standards Board (FASB 2016):

The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

Amendments allow an entity to revert to historical loss information that is reflective of the contractual term (considering the effect of prepayments) for periods that are beyond the time frame for which the entity is able to develop reason

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