Some support for qualitative and environmental factors

May 14, 2015

Tell me how much rainfall we’ll get within the next 30 days to the nearest millimeter. Ready, go.

While providing an exact figure for that question is nearly impossible, you can incorporate certain measures that increase the likelihood that you’ll arrive at an accurate estimation. Qualitative factors are much the same.

If you blindfold examiners and throw them into a bank, the first thing they’re likely to look for is an objective and defensible qualitative analysis. Can you blame them?

Back to the first question. If you told me it was going to rain 483 millimeters, maybe I’d take your word for it. If the well-being of a financial institution rested upon your estimate being reasonable and accurate, I may implore you to explain how you arrived at such a figure.

Did you just guess, or did you examine historical trends using the Standardized Precipitation Index and then adjust the figure based upon sound logic of the current (or potentially projected) meteorological environment?

Within the ALLL, management has to interpret real-world data and draw assumptions in order to determine what adjustments must be made to their historical loss experience to arrive at an accurate estimation of probable and estimable losses. It’s not a matter of calculating a loss rate or measuring impairment for a collateral dependent loan, where you can follow a standardized process and arrive at an exact ending figure (assuming your appraisals are up-to-date). Much to the contrary, it’s an imperfect science of trying to draw some sort of correlation between various sources of data and the impact that variances within that data have on the inherent credit risk of the bank’s portfolio from period to period.

Therefore, it’s no wonder that a) bankers struggle with this portion of the ALLL and b) examiners tend to focus on it. In’s recent poll, bankers indicated that Q Factor support was the content they considered most valuable. For that reason, we wish to equip you with a few resources that may be helpful to increase the objectiveness of this otherwise subjective task:

Webinar: Subjective CECL: Qualitative Adjustments and Forecasts Under the CECL Mode

Whitepaper: ALLL Qualitative Factors: Justifying in Periods of Low Loss

Video: Why You Should Consider a Qualitative Scoring Matrix

Recorded Webinar: Documenting the 9 Q Factors for Your ALLL

Article: Getting the Most Out of Q Factors

Article: Justification of Qualitative and Environmental Factors

In addition, should you ever have questions about Q factors or other parts of the ALLL, you can use the Peer Discussions forum to get insight from other bankers and/or consultants.