Transparency in ALLL Methodology


Transparency in the ALLL calculation


Transparency represents one of the most important characteristics of a comprehensive allowance for loan and lease loss calculation. As the ALLL calculation process can be complex, it is vital that regulators are able to see the assumptions made throughout the process in order to properly assess its soundness.

In order to provide justification, each significant part of the calculation should contain comments explaining the rationale behind assumptions and be supported by extensive documentation. If the regulator cannot easily see the logic and supporting data behind the calculation, it will likely result in a longer and more time consuming exam.

Related Asset - Whitepaper:
Documenting the ALLL: What Examiners Expect

Documenting the ALLL: What Examiners Expect - Download the PDF

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Transparency is especially key when calculating the specific reserve for FAS 114 (ASC 310-10-35) loans. For example, it’s a good idea to break selling costs into as much detail as possible. This provides a clear picture on how the fair value of collateral has been determined.


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