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12 - Validation of Models Used by Banks to Estimate Their Allowance for Loan and Lease Losses

Published online by Cambridge University Press:  02 March 2023

By
Partha Sengupta
Edited by
David Lynch ,
Iftekhar Hasan  and
Akhtar Siddique
David Lynch
Affiliation:
Federal Reserve Board of Governors
Iftekhar Hasan
Affiliation:
Fordham University Graduate Schools of Business
Akhtar Siddique
Affiliation:
Office of the Comptroller of the Currency
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Summary

This chapter focuses on potential issues bank examiners may face while reviewing the quality of a bank’s model risk management practices and validating modeling methodologies used to estimate allowance for loan and lease losses (henceforth ALLL). It discusses both leading and lagging practices in modeling and validating ALLL and examines upcoming challenges in implementing the new standards for allowance computations. In the context of validating ALLL methodologies under the new accounting standards, the author discusses the challenges in forecasting payoffs on existing credit card balances, issues relating to forecasting the economy and long-term losses, issues relating to the application of discounting in ALLL computations etc.

Keywords

Allowance for loan and lease losses
Type
Chapter
Information
Validation of Risk Management Models for Financial Institutions
Theory and Practice
 , pp. 295 - 330
Publisher: Cambridge University Press
Print publication year: 2023

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References

Office of the Comptroller of the Currency. (2012). Comptroller’s Handbook: Allowance for Loan and Lease Losses.Google Scholar
Office of the Comptroller of the Currency. (2006). Interagency Policy Statement on the Allowance for Loan and lease Losses. 2006-47.Google Scholar
Office of the Comptroller of the Currency. (2011). OCC 2011-12: Sound Practices for Model Risk Management: Supervisory Guidance on Model Risk Management.Google Scholar
Remarks by Curry, Thomas J., Comptroller of the Currency before the AICPA Banking Conference. Washington D.C. September 16, 2013.Google Scholar
FASB Accounting Standards Update No 2016-13. (June 2016). Financial Instruments – Credit Losses (Topic 326).Google Scholar
Office of the Comptroller of the Currency. (September 2017). Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses.Google Scholar
Actuarial Review of the Federal Housing Administration Mutual Mortgage Insurance Fund Forward Loans for Fiscal Year 2016. U.S. Department of Housing and Urban Development. November 2016.Google Scholar
Office of the Comptroller of the Currency. (2012). Interagency Supervisory Guidance on Allowance for Loan and lease Estimation Practices for Loans and Lines of Credit Secured by Junior Liens on 1-4 Family Residential Properties.Google Scholar
Accounting Standards Update No. 2011-02: Receivables (Topic 310). Financial Accounting Series; Financial Accounting Standards Board.Google Scholar

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