Frequently Asked Questions | Advisory Services and Shadow Loss Analysis

Advisory Services FAQs

How much history is needed?

Obviously, the more historical data the better. The strong credit cycle we have witnessed in the last few years means we prefer to stretch back in time to when you had your last credit downturn. The additional data provides more sound analytics to perform modeling. 

How many pools are appropriate?

This is a case-by-case situation. We typically find our client moving from call report level pools to more detailed breakdowns. The goal is to segregate high risk assets from lower risk assets, so that the higher risk loans do not affect the loss rates of the higher quality loans. We typically see pool numbers ranging from 12 to 30.

How will CECL affect our current pools?

The need for segregating assets by risk levels takes on a higher importance under CECL. Combining low risk loans with higher risk/loss loans for the life of loan loss estimates can elevate the ALLL calculation. Thus, clients are purposely working to segregate loans by risk and inherently adding more pools to their calculation to mitigate risk. 

What methodologies are you seeing be used by clients?

We have seen a variety of options. Many of the institutions are going to rely on a cohort method, but migration strategies and vintage approaches are becoming prevalent in our work.  

How will CECL affect our credit card portfolios?

Credit card portfolios under CECL provide some challenging issues. The need to determine an average life, payment speeds, appropriate pools, and the variability of the assumptions used to estimate the losses are fairly complex. The financial institution will have to have well-documented and validated assumptions in regards to their credit cards and understand the complexity of the variability of the modeling process to capture a viable estimate of future losses. 

Shadow Loss Analysis FAQs

What does Shadow Loss Analysis allow us to do? 

Shadow loss provides you the ability to run – period over period – a parallel analysis based on the same underlying reconciled data set you’re already importing into the LLA. 

What methodologies can/does the LLA and Shadow Loss Analysis support?

The Loan Loss Analyzer is a methodology agnostic platform – not a blackbox solution, but is tailored to your specific needs and CECL answer – as such the LLA can support and run multiple methodologies simultaneously including Cohort or open pool methodologies, Vintage, PD/LGD and DCF. 

Does LLA/Shadow Loss Analysis have “canned” CECL methodologies?

Canned methodologies imply a simplistic methodology and pooling structure. A core differentiation between MST and other providers is our ability to handle methodologies tailored specifically for the institution and to handle more complex loss models. Rather than force our clients to make their methodology fit into a box, we build the box to fit your needs. 

Questions to ask yourself before beginning your Shadow Loss Analysis Implementation:

1 – Have you defined the methodology you wish to implement?

Have you run the calculation outside of the LLA?

Do you have confirmed results we can use to validate the accuracy of our shadow build?

2 – Is the data required for this methodology present in the LLA currently?

Is it correct and complete?

Is it available throughout the required historical lookback?

If not, is the required data available at all?

3 – Have you considered the timing of building, validating in TEST, then rolling the shadow system into Production?

Will your resources be available to focus on this project, or will they have other priorities that we may need to account for?

To discuss or learn more about Advisory Services or Shadow Loss Analysis, please reach out to Natalie Crawford ([email protected]) or David Todd ([email protected]) or call us at 877-910-9789.