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Forward-looking, ALLL predictive models are the wave of the future

By: Joe Ghammashi, Executive Vice President and Chief Risk Officer
Board Chairman, CEO of Accolade Asset/Liability Management

Joe GhammashiJune 19, 2015 -- The pressure is mounting for financial institutions to utilize forward-looking loss predictive models. Using forward-looking models would more accurately depict the future credit losses an institution would incur, according to the Financial Accounting Standards Board (FASB) and Basel III (a European act intended to strengthen the resilience of the EU banking sector so it would be better placed to absorb economic shocks).

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Using the new, forward-looking model is a departure from the current method, which examines past performance to determine future results. Many challenges face today’s credit unions in the pursuit of these new models.

Typically, these challenges are expensive and require very skilled staff to run and maintain. Additionally, the forward-looking model is only as accurate as the inputted data, and many credit unions have difficulty obtaining the required data from core processers. Other challenges are associated with assumption inputs being too general and global in nature, resulting in loss forecasts that are not representative of the credit union. This means credit unions need to ensure they are using an intelligent model that uses data unique to their institution to more accurately predict future outcomes.

Corporate One’s CUSO Accolade is on the forefront of this issue and has partnered with P360, a dynamic leader in efficient data management and loan analytics, to bring credit unions an affordable and forward-looking Allowance for Loan and Lease Losses (ALLL) model. This model operates within a framework that will allow credit unions access to a sophisticated, predictive model at a fraction of the cost. The model is capable of utilizing credit-union specific data for greater accuracy and reducing volatility to the loan loss provision. Additionally, the model will identify opportunities the credit union can convert into additional lending activities.

We believe it’s a best practice for credit unions to go beyond the calculation of the reserve by developing proactive credit risk management, by developing processes to identify at-risk members, and by being able to advise and help members before they fall behind. In addition, credit unions that collaborate with each other can help defray the cost of the software and share resources in running the model.

If you’re interested in finding out more information about how our ALLL model can benefit your credit union, please contact Accolade’s CEO Joe Ghammashi, CVP, at 866/MyCorp1 ext. 9331 or jghammashi@corporateone.coop.