ALL In: Reserve Methodology Considerations Under FASB’s Current Proposal
Conversations about the Federal Accounting Standards Board’s recent proposal to replace its current Allowance for Loan and Lease Loss model with one that includes “expected credit loss” measurement actually began in 2008.
In the intervening years, many credit unions found their credit loss forecasts to be inaccurate and saw loan loss reserves playing “catch-up” as actual loan loss experience tended to be a lagging metric. Moreover, when the tides turned on delinquencies and losses, the historical loan loss experience models suggested that credit unions continue to add to their reserves when in fact the reserves where already more than sufficient.
While the final version of the FASB proposal concerning reserve methodology is still months away, with the required implementation date likely several months after that, introducing these new credit scores into your organization today makes a lot of sense. As an initial strategy, these scores could be applied to your overall portfolio and the results used instead of traditional credit scores when calculating credit losses and loan loss reserves.