Current Expected
Credit Losses (CECL)
Outsourced CECL Valuations
Why Choose Us
dedication led us to develop a fully compliant CECL model and a series of white papers discussing the standard’s
implementation. Our input assumptions are informed by results from the hundreds of client engagements we have
successfully completed since our firm’s founding in 2003.
We believe the best CECL analysis technique directly incorporates loan-level credit attributes as well as forecasts specific to an institution’s operating footprint. This ensures a comprehensive and well-informed analysis, empowering organizations to make sound decisions regarding their loan portfolios. By providing such tailored and insightful analyses, we aim to equip our clients with the tools they need to navigate the complexities of the financial landscape confidently and effectively.
We believe that a review of ALM modeling should be comprehensive and performed in the context of our client’s policies and procedures and recent financial performance. Our model validation begins with a thorough review of our client’s ALM policies and procedures to better understand our client’s goals, objectives, and risk tolerances. Next, we review our client’s financial statements for at least the past 10 years to understand the institution’s recent financial performance.
After gaining the appropriate context for our review and recommendations, we begin our thorough review of our client’s existing ALM model and Asset Liability Committee (ALCO) reports.
Our Approach
We begin our work by obtaining loan-level detail from our clients to generate the contractual cash flows based on the attributes of any given loan and adjust for:
- Voluntary Prepayments – Conditional repayment rate (CRR)
- Involuntary Prepayments or Defaults – Conditional default rate (CDR)
- Loss Severity or Loss Given Default
A major advantage of this approach is using the same credit indicators (FICO, loan term, loan-to-value (LTV)) that financial institutions use for underwriting and managing loans. This leads to better integration of lending and financial decision making, including risk-based pricing and Optimal Loan Pricing. Given that many institutions lack sufficient data for statistically valid loss estimates, we combine industry-wide data with specific institutional performance. This provides a more accurate risk assessment using the statistical theory of “creditability.” For more details, see our white paper, Implementing CECL.
Incorporating forecasted macroeconomic changes is a challenging part of the CECL standard. We believe that using discounted cash flow analyses and updated credit indicators is the most reliable approach, as it allows for assumptions to be applied from the bottom-up rather than the top-down. For example, when modeling residential real estate loans, we start with an updated LTV based on a recent automated valuation model (AVM) and utilize metropolitan statistical area (MSA)-specific changes in forecasted housing prices. We also incorporate a dynamic default vector that changes based on normal amortization, curtailments, and forecasted changes in housing prices. In this way, we are able to adjust both our default and severity assumptions based on macroeconomic forecasts.
While CECL modeling can seem daunting, Wilary Winn views it as an opportunity to improve credit risk management and optimize capital allocation. Combining granular credit estimates with interest rate and liquidity risk modeling results in a thorough understanding of the primary balance sheet risks on an integrated basis. See our Concentration Risk Management and Capital Stress Testing pages for more detail.
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WHAT OUR CLIENTS SAY
“Wilary Winn has been a trusted partner of SECU Maryland for over 10 years and a strong supporter of the credit union movement. Wilary Winn has provided Maryland’s largest […]”
– Steven L. Arbaugh, Chief Financial Officer, SECU Maryland – Linthicum, MD