Calculating Measures of Loss For Your ALLL
Various methodologies exist to calculate an institution’s loss experience. These different methodologies range in complexity, resource-intensiveness, granularity and comprehensiveness, so it is important that institutions seriously consider the methodology that best suits their needs and ability.
While historical loss is the most widely used method of calculating loss, it is not necessarily the most robust. Other methodologies, such as migration analysis and probability of default/loss given default are viewed as more comprehensive forms of analysis, yet they do require more data and are more difficult to manually calculate.
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How to Determine the Right Measure of Loss
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