Backtesting to Validate Your ALLL Calculation
Backtesting serves as a way to validate the accuracy of an institution’s ALLL results. This exercise works by comparing the actual outcome of credit losses with model forecasts during a defined period.
The main purpose of backtesting is to gauge the effectiveness of an institution’s methodology. If an institution has backtested its ALLL and validated its accuracy, this can serve as a measure of increased defensibility during an exam.
Related Asset - Whitepaper:
Backtesting: Measuring the Effectiveness of Your ALLL Methodology
Backtesting: Measuring the Effectiveness of Your ALLL Methodology - Download the PDF