What are the Allocation Rules in SAS Allowance for Credit Loss
Allocation rules are used during the adjustment task in the workflow within SAS Allowance for Credit Loss. After reviewing the output of the Credit Risk Analysis step, the quantitative analyst might want to apply an adjustment and review the impact on the expected credit loss. you can leverage rule sets to apply adjustments.
From the Rule Set workspace, the quantitative analyst can create an allocation rule set and then apply it from the workflow.
This approach enables the analyst to define:
- the adjustment value
- the adjustment type
- how it is allocated
- and how it is aggregated.
When defining an allocation rule set, you will need to determine the adjustment rule method.
The Adjustment Value Rule Method, is the method in which the adjustment value will be applied. You can use the Value method where the value of the adjustment is considered as a constant number that is used by the rule. Or you can use the Formula method where the adjustment is considered as a formula that is resolved before being used by the rule.
The Apply Adjustment approach enables the analyst to apply the adjustment value to a specific measure variables like ECL. You can also apply the adjustment to specific groups of instruments using attribute-based level filters, such as geography and instrument type.
The measure variable and filter (portfolio slice) for the adjustment drive the combination of aggregation and allocation methods that you choose to apply.
Adjustment Type
- Absolute – the absolute value of your measure variable
- Relative – a % change to be applied
- Increment – a value to adjust your measure variable
Allocation Method
- Even – equally allocated across all records
- Proportional – spreads based on the proportional value of the measure variable or the weighted variable
- Individual – applied individually to each record
Aggregation Method
- Sum
- Mean
- Max
- Min
Now let's look at an example. In the Allocation Rule Example below we can see a hierarchy starting at Bank 1. Auto Loans is an instrument type with three regions rolling up. Finally we can see how the four Instids roll up to the South Region.
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Her the analyst chooses to apply an adjustment for all Auto Loans of 100. Assume that the allocation method is proportional, and the aggregation method is sum. All adjustments are allocated to the instrument level proportionally and summed up to a new total (inclusive of the other instruments).
The adjustment is applied at Auto Loans. Each child will then get a value of that adjustment based on the proportion of the values. Here we can see that Region has the North with a proportion of 33.3%, South with 41.6%, and West with 25%. And we can also see the proportions of the instrument ID.
The adjustment value is then spread proportionally to all the children of the level where the adjustment was applied. After the adjustment is applied to the Instrument IDs, the allocation with a rule of SUM is applied to the roll up of the values to the parent levels.
So, the South region now has a new sum total of 291.59, instead of the original proportional total of 291.6. And we can continue with that aggregation of Sum to Auto Loans with a total of 699.98. And also, a new total for Bank 1 of 1099.98. Note how the HELOC values did not change as there was no adjustment made to that Instrument Type.
Allocation rules are important to understand to ensure that your adjustments to the Expect Credit Loss is applied to the correct level. And how the allocation type and method will impact the children of the level you selected.
For further information and to view a demo of how to apply an Allocation Rule in SAS Allowance for Credit Loss, please review the training course Using SAS Allowance for Credit Loss.
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