Vintage analysis and data collection
Oct 24, 2016
Vintage analysis is a method of evaluating the credit quality of a loan portfolio by analyzing net charge-offs in a given loan pool where the loans share the same origination period. It allows the financial institution to calculate the cumulative loss rates of a specific loan pool, thereby determining the loan pool’s lifetime expected loss experience.
The method is widely used in the analysis of retail credit card and mortgage portfolios, but as Michael L. Gullette, VP Accounting and Financial Management at the American Bankers Association notes, vintage analysis may have a more prominent role under the Financial Accounting Standard Board’s new current expected credit loss (CECL) model. The CECL model may be implemented as soon as Dec. 15, 2018, for institutions wishing to adopt the standard early, but will take effect for SEC filers in 2020 and for all other banks in 2021.
“Vintage analysis, whereby loan portfolios are generally broken out into cohorts by each issuance year, could become a minimum requirement in order to support the ALLL estimate under CECL,” Gullette wrote in a discussion paper for the American Bankers Association. “Other analyses may be more appropriate than vintage analysis as a basis for the ALLL estimate. However, because vintage analysis allows for review of loan activity from the beginning of the life of the loan (origination) to the end (pay-off or charge-off), it will likely be the minimum requirement.”
As noted in the Sageworks whitepaper, “The Basics of Vintage Analysis,” this method is not overly complicated, but its expanded data retention and supporting factor requirements could necessitate changes to current workflows and practices. Banks and credit unions will need a way to document all final reserve calculations, including qualitative and environmental factors applied to quantitative reserve amounts. This process could take time and may compel a best practice of collecting data and implementing process changes ahead of anticipated CECL implementation dates.
Sageworks Risk Management Consultant Neekis Hammond was asked during a recent webinar, “CECL – Initial & Subsequent Measures of Loss,” for guidance for financial institutions to should determine how far back to go when conducting their vintage analysis.
“You can never go too far [back] in a vintage, that’s the nice thing,” Hammond said. “If you’ve got a five-year pool and you run a 10-year vintage analysis, those final five years will just yield 0 percent loss experience.”
Financial institutions, however, can conduct a vintage analysis over a window of time that is too narrow, Hammond said. “The way you’ll know right away if you’re too short is, say you run a 3-year vintage analysis; you’re going back from 2012 to 2015, and you find that you still have a lot of dollars in your 2012 originations. That would indicate that your vintage analysis period is too short and you need to lengthen it.”
One advantage of understanding potential methodologies to use under CECL and to understanding segmentation strategies and measurement techniques as soon as possible is that financial institutions may be able to identify data gaps early enough to reduce those gaps, Hammond said.
Related Asset - Whitepaper:
Whitepaper: Vintage Analysis Basics
Whitepaper: Vintage Analysis Basics - Download the PDF
Related Asset - Blog
Webinar: CECL – Initial & subsequent measures of loss
Excerpt Pulled From Blog:
"In June, the accounting guidance for measuring expected credit losses was finalized, and institutions have since been trying to decipher its requirements and ramifications. Watch the replay of a webinar featuring Senior Risk Management Consultant Neekis Hammond as he unpacked initial and subsequent measures of loss under CECL methodology. "