Qualitative Factors

Due to their subjective nature, the qualitative and environmental factor adjustments often draw more scrutiny and criticism by examiners than any other component of the ALLL calculation. There is little guidance provided by regulatory agencies surrounding the qualitative portion of the ALLL, but it is clearly stated that any adjustments must be clearly documented and directionally consistent.

Guidance does provide nine recommended qualitative factor categories through which financial institutions can account for any disparities between the reserve amount as calculated in the quantitative portion of the calculation and what they believe to be the true amount of expected credit losses within their portfolio (including environmental considerations).

Ways to add objectivity to this portion of the calculation include directional consistency (ensuring that adjustments always follow documented trends), incorporating a qualitative scoring matrix, and backtesting as a method of validating the accuracy of your previous qualitative adjustments.

 


Qualitative Factors