Understanding Expected Credit Loss with SAS Allowance for Credit Loss
Expected Credit Loss (ECL) is the estimate of the total loss that a financial institution may suffer from loan defaults. In this blog, we will explore ECL and two of its major regulations, CECL and IFRS9. We will also examine how SAS Allowance for Credit Loss can be used for calculating your Expect Credit Loss.
Expected credit loss (ECL) is a financial concept that involves estimating the potential losses a financial institution might incur over the life of a loan. This estimation uses a forward-looking approach, considering all relevant factors and information available, such as historical experience, current conditions, and reasonable and supportable forecasts.
What is CECL: Current Expected Credit Loss?
CECL requires financial institutions to estimate expected credit losses over the life of a loan, using a forward-looking approach that takes into account all relevant factors and information available. This includes historical experience, current conditions, and reasonable and supportable forecasts. The regulation also requires institutions to disclose more information about their credit risk and management practices.
Here are some key provisions of the CECL regulation:
- Use of Historical Data
- CECL requires institutions to use historical data, current conditions, and reasonable forecasts to estimate expected credit losses over the life of a loan, providing a more accurate picture of credit risk.
- Consideration of Creditworthiness
- CECL requires institutions to consider the borrower's creditworthiness when estimating expected credit losses, ensuring that all factors that may impact the borrower's ability to repay are taken into account.
- Collateral and Economic Environment
- CECL requires institutions to consider the asset's collateral and the economic environment when estimating expected credit losses, providing a more holistic view of credit risk.
What are the benefits of CECL?
CECL provides a more forward-looking approach to credit loss estimation, which will improve the accuracy of financial institutions' loss estimates. It also simplifies the accounting process by eliminating the requirement for incurred loss models and allowing for more timely recognition of losses, simplifying the accounting process.
CECL applies to all financial institutions that offer loans, including banks, credit unions, and non-bank lenders. The regulation will have a significant impact on these institutions' financial statements, with some estimates indicating that it could result in an increase of up to 50% in banks' loan loss reserves.
What is IFRS9: International Financial Reporting Standard 9?
IFRS9 is a regulation that requires financial institutions to estimate their expected credit losses over the life of a loan, similar to CECL. However, IFRS9 requires financial institutions to classify their financial assets into three categories: those that are either held to maturity, those that are available for sale, and those that are held for trading. The regulation also requires institutions to estimate the expected credit losses for each category of assets using a variety of models and methods.
What are the benefits of IFRS9?
IFRS9 provides a more accurate and transparent approach to credit loss estimation, which will allow financial institutions to make better decisions about their lending practices. It also provides more consistency and comparability in financial reporting across different institutions and countries.
IFRS9 is a global regulation that applies to all financial institutions that use International Financial Reporting Standards (IFRS). The regulation will have a significant impact on these institutions' financial statements, with some estimates indicating that it could result in an increase of up to 30% in banks' loan loss reserves.
Why Use SAS Allowance for Credit Loss?
SAS Allowance for Credit Loss provides a robust solution for credit loss calculation and reporting. With its flexible modeling capabilities and scenario analysis, SAS allows financial institutions to make informed decisions about credit risk and improve their risk management practices. Additionally, SAS provides robust documentation and audit trails for regulatory compliance, reducing the risk of noncompliance penalties.
SAS Allowance for Credit Loss makes it easy for financial institutions to create disclosure reports for regulatory compliance. With detailed documentation and explanations of credit loss calculations, SAS ensures that reports are accurate and transparent. Additionally, SAS allows for customizable reporting to fit the needs of each institution, making it an ideal solution for financial institutions of all sizes and types.
You can find more information on how to use SAS Allowance for Credit Loss in the Using SAS Allowance for Credit Loss course.
