Institutions estimate credit losses under a current expected credit loss model, recognising lifetime expected losses at origination rather than waiting for a loss to become probable.
Scope. Loans held for investment, held-to-maturity securities, off-balance sheet credit exposures, and certain receivables.
Methodology. Institutions may select among approaches — discounted cash flow, loss rate, vintage, probability of default. The selection must be documented, appropriate to the portfolio, and applied consistently.
Reasonable and supportable forecasts over a defined period, reverting to historical loss experience beyond it. The forecast period, the reversion method and the economic scenarios used are the principal judgments and the principal examination focus.
Qualitative adjustments to historical data for changes in underwriting, concentrations, portfolio composition, collateral values and economic conditions, each supported by a documented rationale.
Individually assessed loans where the borrower is experiencing financial difficulty and repayment depends on the collateral.
Governance. Model validation, back-testing, board and committee review, and documentation sufficient for an examiner to reproduce the result.