Validate Qualitative Factors With Backtesting
Backtesting the ALLL refers to comparing the actual outcome of credit losses with model forecasts during a defined period to validate the accuracy of the model. In other words, institutions can retroactively prove that their ALLL levels were appropriate with actual incurred losses.
If an institution has a sound backtesting policy in place and can validate the accuracy of its model, this can serve as further evidence when defending any future qualitative analyses within the ALLL calculation.
Related Asset - Whitepaper:
Backtesting: Measuring the Effectiveness of Your ALLL Methodology
Backtesting: Measuring the Effectiveness of Your ALLL Methodology - Download the PDF