Absolute Expected Loss®
Absolute Expected Loss® enables lenders to derive Probability of Default, Exposure at Default, and Loss Given Default values to calculate Expected Loss and to determine prudent and defensible reserves for losses.
BENEFITS TO USERS
- Improve the accuracy and effectiveness of forecasting, reserving, portfolio management, credit decisioning, structuring and pricing.
- Perform bottoms up (contract level) calculation of expected loss.
- Understand loss risk by collateral type, geography, business unit, vintage, transaction size, transaction source, etc.
About Absolute Expected Loss
New Current Expected Credit Loss (CECL) regulations (FASB 825-15) that change the loan loss reserve estimation to lifetime Expected Loss (EL) pose new challenges. Optimizing loan loss reserves is one of the most important challenges that a financial institution faces. If a financial institution sets aside too much capital for reserves, it will unnecessarily limit the company’s potential profits due to lower than optimal loan volumes. However, if not enough capital is set aside, the institution’s financial viability is at risk if losses exceed the capital buffers.
A key component in the calculation of EL is Loss Given Default, the estimation of the probable recovery of a realizable asset in the event default occurs, given EL = Probability of Default (PD) x Exposure at Default (EAD) x Loss Given Default (LGD).
Our Absolute Expected Loss model provides lenders with powerful, consistent, and objective LGD estimates at a contract level that incorporate a large share of factors that are predictive of LGD. The model leverages our extensive loss database consisting of 500,000 contracts, spanning two decades and presents 28 quarters of forecasted LGD estimates, in conjunction with AbsolutePD and EAD projections.
TO LEARN MORE HOW ABSOLUTE EXPECTED LOSS CAN improve the allocation of reserves, especially for CECL, contact us today.