Expected Loss is a recognized best practice that facilitates active portfolio management and rationally objective risk based pricing. Lenders that manage accurate Expected Loss are consistently more profitable and carry better business valuation through the credit cycle. The requirements of CECL do not represent a minor evolution in your reserve process. For most lenders, CECL will require a whole new infrastructure of data and analysis. PayNet believes, properly implemented, Expected Loss will revolutionize your risk management practices.
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Probability of Default
Expected Loss requires empirically derived forecasts of the Probability of Default of each borrower in your portfolio. The question is how to create an accurate forecast with the limited loss experience available in your portfolio. PayNet delivers empirical data for your market footprint from the business cycles of the last decade. Furthermore, PayNet can provide you with the ultimate granularity of a distinct, quarterly calibrating, Probability of Default forecast for each borrower in your portfolio.
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Exposure at Default
Expected Loss requires prudent estimates of Exposure at Default backed up by historical performance data. The conservative answer is that all available credit will have been accessed at the time of default so the challenge is to provide data that will allow a better estimate. Realistically, most banks either do not have that data or they do not have enough of it to provide a statistically meaningful answer. PayNet can provide data on prepayments on good loans as well as bad ones that corresponds to a similar business profile to support a position on EAD.
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Loss Given Default
Expected Loss requires informed estimates of Loss Given Default that recognize not only the nature of the facility but the capability and practice of the lender. Estimates of Loss Given Default will have to be calibrated to the economic cycle just like Probability of Default. Financial institutions will need access to data that can provide the depth needed to persuade auditors and regulators of the most probable outcomes. PayNet can help you build and maintain cycle-calibrated Loss Given Default using our database of over 23 million commercial loan histories.
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