How Can You Use the ALLL in Other Areas of Banking?
Jan 21, 2015
A Sageworks consultant describes how institutions can use the results of the ALLL in areas such as stress testing and insight into portfolio performance. A lot of the data utilized for the ALLL goes into a top-down, institution-level stress test, and much of the information extracted from the analysis of the ASC 450-20 (FAS 5) portion of the ALLL can be leveraged to determine which products are performing, which are most risky and in which direction the institution wishes to go with its portfolio.
When financial institutions are calculating their ALLL, they certainly can utilize their reserve and their allowance process in other areas of running their risk management practices within their financial institution. I think one of the main ways, right off the bat, would be utilizing your ALLL results to help us identify maybe some stress testing policies and practices within your institution. If we’re doing a top down stress test approach, a lot of the data that we utilize for the allowance goes directly into a top down or an institution-level stress test. We’re talking historical loss rates, qualitative adjustments – that’s the main focus when we’re doing institution-level stress testing, and that directly plays into that scenario and that process. Certainly institutions also understand and can evaluate quite easily through their FAS 5 analysis or their FAS 114 analysis maybe which loans or which products are more risky than others. That allows them a little more insight in terms of developing a more appropriate risk appetite, really to again identify which loans they might want to go after, which loans they want to close, or which markets or segments they want to proactively seek out in terms of lending opportunities and practices.