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Probability of Default/Loss Given Default analysis is a method used by larger institutions to calculate expected loss. A probability of default (PD) is already assigned to a specific risk measure, per guidance, and represents the percentage expected to default. Loss given default (LGD) expresses the expected loss as a percentage and is unique to the industry or segment. To learn more about the PD/LGD approach and the pros and cons of using it under the Current Expected Credit Loss Model (CECL), download this infographic, CECL Methodologies: Pros and Cons for Your Portfolio, or read about how one financial institution incorporated PD/LGD into its allowance calculation.
This year, the Financial Accounting Standards Board (FASB) continued its earlier discussions on the accounting treatment for acquired financial assets that are within the scope of CECL. Several tentative FASB decisions, if finalized, will have an impact on financial institutions that have been acquisitive in recent years as well as those planning for future deals. Key tentative decisions and timelines are shown in this blog. The FASB’s description of proposed changes can be found here.
This year, regulators emphasized financial institutions' responsibility to provide leaders with information on key areas of planning, operations, and risk management. So how can banks and credit unions quickly spot warning signs so they can act during volatile economic, industry, and institutional conditions? Read this blog for ten key reports on capital, growth, and liquidity that can help financial institutions identify increased risk and shape strategy in tricky conditions.
Many financial institutions are questioning where rates are headed and how to structure their ALM strategies accordingly. As regulators focus on interest rate forecasts used for interest rate risk management, remember that flattening, steepening, or inverting yield curves can influence your projections. Read this blog for a better understanding of the mathematical relationships in each of these projections.
During a 2023 Abrigo webinar, about two-thirds of participants said their financial institutions had a model risk management process in place, as well as an inventory of models. About 30% did not have these but were planning on them in the next two years. Regulatory guidance says management should periodically validate the loss estimation process for the allowance for credit losses and any changes to it to confirm its appropriateness for the institution’s size, complexity, and risk profile. Read this blog to learn what’s involved in CECL model validation and what can banks expect from this risk management process.
