Defining a reasonable and supportable forecast period that can be defended to auditors and regulators

Defining a reasonable and supportable forecast period that can be defended to auditors and regulators

By Fiona Zou, Vice President, Global Risk Analytics, HSBC

Could you please tell our readers a little bit about yourself, your experience and what your current professional focus is?

I have worked in the quantitative modelling area for approximately 9 years, first at Morgan Stanley and then HSBC. My main focus has been Wholesale credit risk model development and validation for Basel AIRB models, CCAR stress testing models, and recently IFRS 9/CECL models. I found the idea of applying quantitative skills to solve day-to-day problems fascinating when I first started my career in the risk management area, and I still do now.

What, for you, are the benefits of attending a conference like the CECL Congress and what can attendees expect to learn from your session, building a CECL framework on top of IFRS 9?

The main benefits for me of attending a conference like 3rd Edition CECL 2018 would be to keep up to date with the best industry practice, see how the industry evolves and converges especially when a new regulation or accounting rule just come up, and to learn from our peer banks. As one of the duel filers trying to build the CECL framework on top of IFRS 9, we would like to share our experience (including both fruitful explorations as well as hair-pulling frustrations) with our peer banks, which hopefully can be leverageable and beneficial to the attendees.

What are the key challenges of gap analysis between CECL and IFRS 9, and do you have any tips?

One of the key challenges of the gap analysis is to be able to translate accounting requirements into model development and implementation impact, which we received quite some helps from our accounting team and leveraged their expertise. The other challenge is to justify the decision made for CECL is the “best estimate”, while maintaining consistency with IFRS 9 if possible. Many technical papers have been written for that purpose.

You will be joined by panellists from Bank of America and BMO Financial Group, in your opinion how can reasonable and supportable forecast period be defined?

Reasonable and supportable forecast period depends on both the availability of external professional/published forecasts, as well as the best judgement and effort of internal economists and scenario team. For duel filers, it is preferable to keep the consistency of R&S period between CECL and IFRS 9, or at least it’s a good starting point.

What are some of the key requirements to ensure credible forecast leading to successful CECL implementation?

Perform parallel run for several quarters prior to the go-live date, in order to test the process end-to-end. Also, would be helpful to test the model sensitivity to the macroeconomic scenario change within the functionality of the implementation engine, to gain some good understanding of expected model behaviour /impairment volatility.

How do you see CECL impacting the financial risk landscape over the next 6-12 months?

From modelling perspective, as CECL becomes more business as usual (BAU), point-in-time (PIT) model performance over a longer horizon (eg. 3-year, 5-year, lifetime) and under the baseline scenario would likely to become a focus, as per the CECL lifetime loss requirement. Also, discussion around having a combined or separate stress testing and CECL modelling and process will likely to emerge. In terms of lending practice, it might have an impact on the product maturity, especially when lifetime loss is being reserved, but probably that will not happen in the near term.


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