Loss Forecasting
CECL and Stress Testing
Loss forecasting for banks−whether CECL or stress testing−is our specialty! That’s end-to-end: from building and preparing developmental databases to the actual model development to implementation within commercially-available (or our custom) production platforms to ongoing performance monitoring (OPM) during production to qualitative adjustments frameworks that are closely related to OPM.
Can a single loss forecasting model be best for both CECL and stress testing? Had you asked us in 2018, we would have (and did) say, “no,” but today we know it’s not just possible, it is our standard approach, which is based two innovations.
- Loss forecasting based on economic theory, rather than simply statistical regularities that provide rigorous yet intuitive risk measures that are sound, sophisticated, and simple.
- Insights into the nature of historical observations and patterns and their applicability to forecasting.
Our Approach
Spero Risk Associates has substantial experience with all aspects of stress testing, scenario analysis, and design, especially, but not limited to, CECL, CCAR and DFAST. In fact, we built many hypothetical and historical scenarios for both credit and market risk, as well as joint credit-and-market loss scenarios years before the crisis and CCAR.
We understand relationships between the firm, its environment, and risk factors, such as the industry, social and political conditions, technology, and regulations, which are as ever-changing as the firm.
Understanding the consequences of potential events can provide valuable, actionable information.
Along with a loss-forecasting framework, we are able to recommend and build appropriate scenario and sensitivity analyses as well as ongoing monitoring to estimate the consequences of potential combinations of events and how forecasts can affect your model’s bounds. Analysis can be quantitative, qualitative, or both and can be extremely valuable when implemented correctly, especially the frequently overlooked learning opportunities. We have built successful monitoring programs in a package alongside loss-forecasting models, and have also customized monitoring programs for existing frameworks to satisfy auditors’ questions and provide your level of needs.
Our Experience
We have built models in all key areas of management, as well as crucial models in finance and accounting.
Consumer & Retail Credit
- Automotive
- Credit Card
- Residential mortgage, HELOC, and home equity
Wholesale Credit
- C&I
- Commercial Real Estate (CRE)
- Bond portfolios
Other Forecasting
- Macroecon, regional, & state variable forecasts
- PPNR revenues or fees and expense
- Operational risk loss forecasting
Related Insights
INSIGHT
Like much financial and credit model development, scenario analysis is research as much as development or construction. Scenario analysis leads to a better understanding of the relationships between the firm and its environment and risk factors.
INSIGHT
The same mitigants can reduce losses in unconsidered situations, e.g., contingency plans for one disaster may work for an unforeseen one. These benefits are unknown beforehand and may be attributed to serendipity or luck but are realized because precautions, insurance or….
ANALYSIS
A few years ago, the Federal Reserve revised guidance documents on supervisory assessment of capital planning and positions (SR 15-18 and SR 15-19) based on their tailoring framework finalized in 2019. We summarize the guidance and analyze the recent revision differences to the tailoring framework.