Validating your CECL model: What’s important to know

Validating your CECL model: What’s important to know

Ahead of the CECL Congress 2017, we interviewed Ben Shiu, Director, Data and Analytics – Model Risk at Protiviti.

Ben, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I am a Director with Protiviti, focused on advising banking industry clients on credit risk management , CCAR modeling and regulatory compliance, and model risk management matters. I have almost 20 years of experience in developing, validating, and reviewing credit risk capital, stress testing, and PPNR models and am currently leading a task group to develop Protiviti’s CECL/IFRS 9 modeling methodology and overall solution. Prior to joining Protiviti, I worked for several top U.S. banks and focused on developing internal credit risk models, and credit card portfolio management strategies.

At the CECL Congress, you will be sharing your insight regarding validating a CECL model. Why do you believe this is this a key talking point?

CECL brings significant changes from what we have come to expect with the existing ALLL incurred loss model. Under CECL, organizations with loan portfolios will not only apply credit loss forecasting models but will also need to integrate other models and analytic results into the loss reserve estimation process.

Therefore, it is critical for these organizations to have a validation roadmap and plan to cover every perspective of the CECL requirements.

What challenges will be faced when complying with SR-11?

Backtesting for CECL could be challenging. The outcome analysis should not include just the credit loss forecasting model output, but should also include the overall ALLL level, which is an aggregated output from several assumptions and sub-models. In addition, for some portfolios, because the performance window needs to cover the effective portfolio lifetime, sufficient historical data is required to monitor and assess model performance.

What is a positive comparison between CECL, incurred loss and CCAR stress testing models?

I am looking forward to discussing details of the comparison between CECL, incurred loss and CCAR stress testing models during the conference. In short, CECL requires more assumption inputs, such as effective lifetime, foreseeable future and mean reversion level and a longer performance window compared to incurred loss and CCAR models.

What, in your opinion does the future hold for a risk professional focusing on CECL, and how can they keep up with the increasing change?

Compared to CCAR and Basel II implementations, CECL will be applied to more institutions and those organizations will be required to integrate more models into the process. CECL also offer opportunities for finance and risk professionals to work closely together. Individuals with the background and experience from both sides will be in high demand.