When Should You Use Peer Data in the ALLL Calculation?
Jan 21, 2015
A Abrigo consultant references the use of peer data in the ALLL calculation. Benchmarking tends to be the most prevalent use of peer data, but there are several other applications, such as generating loss experience for de novo institutions. However, the speaker recommends that in most cases it is beneficial to rely on your own experience and to use qualitative and environmental factors as necessary.
Peer data being used as a part of the ALLL calculation is most commonly used for benchmarking. We want to ask, “How are we matching up against our peers in certain characteristics?” and in this case, probably most commonly total allowance to loans. In terms of the rest of the calculation, for institutions without extensive loss history, or in some cases even DENOVO institutions, we’ll sometimes see them relying on peer data for loss rates. That is certainly a good comparison if you do not have better information, but in the end, it will be better overall if you are able to rely on your own loss experience. For institutions that do not have much loss experience, that is certainly a good problem to have in many ways. If that’s the case, it is still probably best to rely on your own experience, and then use qualitative and environmental factors to adjust as necessary.