Objectivity in ALLL Methodology

The ALLL calculation is meant to be representative of probable and estimable losses as of the balance sheet date, so it should be based upon sound analysis and objective assumptions.


Objectivity in the ALLL


Although it would be ideal to be able to empirically justify all aspects of the ALLL, it is, by nature, a subjective calculation. The clearest example of that subjectivity is in the environmental and qualitative factors which are used to account for factors that may not be encompassed through the historical loss calculation. In order to provide support and justification for environmental factors, various measures, such as utilizing a qualitative scoring matrix and ensuring directional consistency, can be incorporated to add objectivity.

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The qualitative component of the calculation can be confusing and overwhelming for many. Identifying key drivers for each of your qualitative factors and utilizing a scoring matrix can help add structure and objectivity to the process.


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