qualitative scoring matrix
Defending Qualitative Factors
When it comes to defending Q factors, documentation is key. An institution will be well suited to defend their qualitative and environmental risk factors if they are objective, directionally consistent, and properly document their assumptions.
Justification of Qualitative and Environmental (Q/E) Considerations
As required by regulatory and accounting guidelines, historical loss experience is the starting point for estimating future loss expectations. In a stable environment without significant changes in process, personnel, or portfolio concentration, historical experience offers a reasonable approximation of expected future losses. However, a constantly changing environment requires management to assess how changes may affect future losses.
Objectivity in Adjustments
There are various measures institutions can take to add objectivity to the otherwise subjective task of qualitative and environmental risk factors. These consist of incorporating a qualitative scoring matrix into your Q factor analysis, ensuring directional consistency, and sticking to the nine recommended Q factor adjustments, among other things.
The ALLL calculation should be objective in nature; that is, when attributing qualitative and environmental factors to the allowance, there should be sound reasoning as to why certain adjustments were made. An objective ALLL ensures that there is no management bias or partiality to skew the results of the calculation one way or another.