Exposure at Default- CECL Ramifications

Under CECL Framework, the ECL can be computed using cash shortfall approach or a modular approach using risk parameters like PD, LGD, EAD and Maturity. Of these, we have discussed PD and LGD in detail in our previous blogs. In this blog we intend to touch upon Exposure at Default …

Cash Shortfall & LGD

Current Expected Credit Loss (CECL) for financial instruments should be an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes. To meet this requirement, banks will be required to determine “Expected” default path of the financial instruments and estimate the possible “Credit Losses” along that …

Crystal Gazing- Estimating Lifetime PDs

In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the CECL framework. For computation of Current Expected Credit Loss (CECL), FASB expects organizations to consider forward-looking information including macroeconomic factors that are relevant to the exposure being evaluated and that must go beyond historical …

PD Calibration- A Delicate Balancing Act

As discussed in our previous blog, PIT PD describes an expectation of the future, starting from the current situation and integrating all relevant cyclical changes & all values of the obligor idiosyncratic effect with appropriate probabilities. A PIT PD mimics the observed default rates over a period of time.TTC PDs, …

Demystifying PD Terminologies

Contrary to the common misconception, PD as a parameter is very distinct from default rate. The default rate accounts for actually realized defaults over a given period, while PD is the predicted probability that a pool of obligors will default over the predefined future time horizon. This time horizon is …

Impairment Modelling

The new standard on financial instruments accounting – Credit Losses from FASB has significantly transformed banks' existing impairment assessment to address concerns about “too little, too late” provisioning for loan losses. The current expected credit losses (CECL) model requires that the full amount of expected credit losses be recorded for …

Current Expected Credit Loss (CECL)

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), Financial Instruments-Credit Losses in June, 2016. This ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments which is based on an estimate of Current Expected Credit Losses (CECL). The ASU will apply to