ALLL Calculation: Defending Qualitative Risk Factors
In generating and documenting qualitative and environmental adjustments within the ALLL, institutions can take certain measures to increase the defensibility of this subjective task. For one, adherence to the nine standard qualitative factors defined by regulatory guidance in the 2006 Interagency Policy Statement helps ensure that an institution is using appropriate considerations to adjust their quantitative calculation. These are defined by guidance, so following them in the scope set out by guidance gives a framework to an institution’s methodology.
In using these nine factors, or perhaps others set by the institution, financial professionals must not fluctuate from the source of their defending documentation. If using Federal Reserve Economic Data, such as the unemployment rate to justify changes in national economic conditions, it should use that same source of data when it performs its next qualitative and environmental analysis. If the institution uses the same sources and adjusts its Q factors in line with any changes in its sources, it will ensure that the process is directionally consistent.
In addition, institutions can incorporate a qualitative scoring matrix to add further objectivity to the calculation and help defend their adjustments. A scoring matrix provides quantitative adjustments to these qualitative factors, and can help to show examiners that you have been consistent in your sources and have accounted for any changes from period to period.