CECL models may leave banks ill-prepared for next downturn
Mortgage backtest study shows some loan-loss models miss the mark
Some models used by US lenders to set loan-loss provisions under new accounting rules fail to produce accurate estimates of credit risk during economic downturns, research reveals. The study backtested six modelling methods with mortgage data from the financial crisis of 2008 and showed that most models were unable to equip banks with appropriate levels of reserves.
The results raise questions for banks as they adapt to the Current Expected Credit Loss (CECL) regime, a new set of standards that
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