migration analysis effective alll
DESCRIPTION
Migration Analysis: The Way Forward for an Effective ALLL. Financial institutions will learn about using migration analysis as a methodology to calculate their ALLL. The content covers: the process of migration analysis, how the methodology is viewed by regulators, challenges financial institutions face in implementing the methodology, benefits of using migration analysis compared to other methods, and an overview of recommendations for a financial institution considering implementing migration analysis. Learning Objectives: 1) To understand what Migration Analysis is, and its role in calculating the ALLL. 2) To understand how Migration Analysis differs from other methodologies used in calculating a financial institution’s ALLL. 3) To gain an understanding of how Migration Analysis works within a loan portfolio. 4) To identify key requirements a financial institution needs to implement Migration Analysis, and how they can pose challenges. 5) To learn how Migration Analysis is viewed by regulators/regulation. 6) To identify the key benefits of using Migration Analysis over other methodologies. 7) To identify preparations a financial institution can take to transition from an existing methodology to Migration Analysis. 8) To understand how the advent of automated solutions has simplified Migration Analysis for financial institutions.TRANSCRIPT
Date of last revision: June 6, 2014
Financial information company that provides credit and
risk management solutions to financial institutions
Data and applications used by thousands of financial
institutions and accounting firms across North America
Provides resources for bankers, including whitepapers,
webinars, videos, and templates—accessible at
www.sageworksanalyst.com
Ed Bayer: Managing Director
of Financial Markets
Garrett Morris: Senior Risk
Management Consultant
What is Migration Analysis?
Examples
What Regulation Says
Preparing for Migration Analysis
Benefits of the Methodology
Migration Analysis & CECL
Why many banks do NOT currently use migration analysis
How an automated ALLL solution can help
Migration analysis is a methodology that evaluates a pool of
loans to default or loss over a certain time frame
How is it different from other methodologies: ◦ Historical Loss
◦ Peer Group Data/Call Report
◦ Probability of Default/Loss Given Default
Used by banks able to handle extended loan level gathering
requirements ◦ Adequate number of loans in each pool is necessary
Archived quarterly periods
Individual: ◦ Loan balance
◦ Segmentation
◦ Risk rating/level
◦ Full & partial charge-offs
◦ (Optional) Days past due
Segmentation of loan portfolio into pools
Gather historical loan data
Track individual loans to loss over a selected time horizon
through chosen sub-segments
Apply and document calculated loss rate to today’s sub-
segmentation balances
Detailed sub-segmentation is required to accurately measure
migration
◦ Segment into homogenous pools
◦ Sub-segment by risk level, risk rating, or days past due
Accurately and consistently enforced loan review process
When segments change due to reorganization or merger,
those changes must be pushed back in time
Loss horizons
◦ Segments perform differently over time and may need different
migration periods
Does not specify one, best, method for determining historical loss
experience
“… depends to a large degree upon the capabilities of its
information systems”
Does encourage a “comprehensive” approach, which requires
more robust data and analysis to increase accuracy
Bolster your risk rating system
Set up processes to collect sufficiently granular data
Assure loan-level historical data is accurate
Invest in technologies equipped to manage and deploy as needed
Run multiple scenarios to understand the impact of switching to
migration analysis before switching entirely.
Examiners see it as a more sophisticated methodology
More granular, with extensive segmentation of the portfolio
Should result in a more accurate allowance
Insight into changes in portfolio composition and credit quality
deterioration
Migration analysis adjusts the ALLL provision to reflect the
conditions of the current portfolio
Can more effectively justify a decrease in provisions, if
merited ◦ Subjects institution to less examiner scrutiny
Can drive pro forma projections
Current Historical Loss Rates Future Expected Loss Rates
Data required each quarter Data required each quarter
Charge-offs Charge-offs
Recoveries Recoveries
Aggregate pool data Aggregate pool data
Beginning balance pool Beginning balance pool
Ending balance pool Ending balance pool
Risk rating by individual loan
Individual loan balance
Individual loan charge-offs &
recoveries (partial + full)
Loan duration
Insufficient data history
24%
Not enforced by my
examiners 20% Portfolio
size limitations
13%
Insufficient capabilities to
run 24%
Don't fully understand
19%
Why is your financial institution not using migration analysis?
Difficult to manage in spreadsheets & without due resources
Requires significantly more granular, loan-level data
◦ 1,000 loans require 36,000 lines of data for three year’s worth of
analysis
Portfolios must have sufficient volume to allow for sub-
segmenting—difficult for small institutions
Requires historical, high-quality data and well-managed risk
rating system
Advent of automated ALLL solutions have made process of
migration analysis much easier
Save time in data aggregation and entry
Reduce manual errors in calculations
Generate documentation
Reduce examiner criticism
Benefits
Examiners believe it’s more
sophisticated
More granular
Highlights changes in portfolio
composition and quality
Can drive pro forma projections
Can more effectively justify a
decrease in provisions, if
merited
Assist in preparing for FASB’s
CECL
Challenges
Difficult in spreadsheets
Requires more granular data
Portfolios have to have
sufficient volume
Requires historical, high-quality
data and well-managed risk
rating system
ALLL & stress testing presentations, panels, group discussion
and networking
More info: web.sageworks.com/summit
Ed Bayer Managing Director – Financial Markets
Garrett Morris Senior Risk Management Consultant
Additional resources:
◦ Whitepapers, archived webinars and more: www.sageworksanalyst.com
◦ LinkedIn Group: “ALLL Forum for Bankers”
◦ Risk Management Summit: web.sageworks.com/summit