It’s recognized that migration analysis is a more comprehensive loss rate calculation for banks and credit unions, as it more accurately reflects loan performance and loss over time.
But it’s not a process that can be started overnight. Successful implementation of migration analysis requires several, initial steps.
The first step is to ensure proper data collection, which includes the careful and consistent application of the institution’s risk rating methodology. For migration analysis, the loan portfolio must be segmented into homogenous pools and then sub-segmented by risk classification or delinquency status. In order for these pools to be accurate, it is critical that the loan risk classifications are updated promptly on an ongoing basis.
A hypothetical example of this could be pools based first on concentration (C&I) and then risk (Pass, Special Mention, etc.), and those sub-segmented pools are tracked over time to measure actual loss experience and use it to predict future loss experience for similarly classified loans.
Once the proper systems are in place for data capture and retention, institutions must determine the time period over which they will calculate loss rates.