The challenges are many as institutions assess their path to CECL compliance. This Discounted Cash Flow approach provides an effective way to analyze and interpret model results at the loan level or any other summary level.
CECL Changes Everything
The new current expected credit loss guidance commonly referred to as “CECL” was developed in response to the global financial crisis, which began in late 2007. CECL introduces new dynamics for financial institutions in their asset planning and management.
FASB offers general guidelines in their pronouncement. As such, CECL is viewed by many as an open-ended standard with several possible methodologies for compliance. This white paper focuses on the impact of CECL on loan portfolios using several of the loss modeling methodologies outlined in ASC 326.
We combine several loss modeling techniques and create a discounted cash flow (DCF) model. In the model construction, we examine Probability of Default (PD), Loss Given Default (LGD), prepayment speeds, transition matrices, and economic forecasting. Statistical and regression analysis are tools employed to inform model variables.