New CECL Model, "Defaults Dynamics," Makes Banks too Smart to Fail, According to Dr. Dan Geller of Analyticom
"Default Dynamics" is more than just an allowance forecast - it is an early warning system about the next recession
SAN FRANCISCO, Oct. 16, 2018 /PRNewswire/ -- A new Current Expected Credit Losses (CECL) model called "Defaults Dynamics" was introduced today by Analyticom, the leading provider of behavioral economics models for financial services. Defaults Dynamics is a scientific CECL model that helps banks and credit unions stay solvent by adjusting their allowance for credit loss to the economic environment, and alerting them, in advance, to the arrival of the next recession.
The Defaults Dynamics CECL model complies fully with the Probability of Default (PD) method established by the regulators for estimating credit losses. PD is the most advanced model for calculating CECL because it utilizes an economic predictor for probability analysis. More and more institutions are shifting to PD for their CECL forecast.
"Moreover, Defaults Dynamics is the only CECL model that is based on a scientific economic predictor that is peer reviewed and published in a scientific journal. No other existing CECL model is backed by the scientific community. This standing provides Defaults Dynamics the highest level of credibility and validity to the CECL model," said Dr. Dan Geller, president of Analyticom.
Regulators created CECL because during the last recession, allowances for credit losses were "too little; too late" (Regulators' statement), and because financial institutions did not have a forward-looking method to alert them to the looming recession.
"In other words, CECL is more than just an allowance calculation – it is an early warning system," Geller said.
Defaults Dynamics utilizes a behavioral economics predictor to project changes in the economic cycle. Statistical analysis shows that as much as 80 percent of the increase in loan defaults is caused by changes in the economic environment. Thus, when the economy starts to decline, the number of loan defaults increases because more people are defaulting on their loans due to loss of jobs and income.
Banks and credit unions can instantly start calculating their CECL with Defaults Dynamics. They already have their loan portfolio segmented by category, i.e. personal loans, mortgages etc. and each loan category is grouped or pooled by risk level, i.e. excellent, good etc. or numerically from 1 to 10. All institutions need to do is to enter the figures they already have into the CECL-rate calculator that comes with Defaults Dynamics.
The Defaults Dynamics CECL model was designed to be non-intrusive to the financial institutions. The model does not require costly and cumbersome software installation process, nor does it require the financial institution to send sensitive loan data to outside sources for processing. Defaults Dynamics was designed to work on any computer anywhere.
Defaults Dynamics has a dual purpose. First, it provides bankers with an early warning system of a looming recession, allowing them to take preventive measures with all future loans. Second, it projects the allowance for credit losses, based on the declining economic conditions, for the life of the current financial assets.
The Financial Accounting Standards Board (FASB) issued the final current expected credit loss (CECL) standard on June 16, 2016. After the financial crisis in 2007-2008, the FASB decided to revisit how banks estimate losses in the allowance for loan and lease losses (ALLL) calculation. The early application date for CECL is December 15, 2018.
About Analyticom
Analyticom is a behavioral economics firm dedicated to providing banking executives with advanced analytics on the impact of consumer financial behavior on banking products. The mission of Analyticom is to assist banking executives make better risk-based decisions.
For the first time ever, a scientific study by Dr. Dan Geller shows the impact of money anxiety on banking products. The study, "Dynamics of Yield Gravity," was presented by Dr. Geller in a keynote address at the Banking Analytics Symposium, and at the International Conference on Business and Economic Development.
About Dr. Dan Geller
Dr. Dan Geller is a behavioral economist who pioneered the research and application of behavioral economics to the banking services. Through his research firm, Analyticom, Dr. Geller provides banking executives with scientific forecasting and pricing tools enabling them to improve financial performance. Dr. Geller is a frequent speaker and media guest. He appeared on national TV and radio, such as CNBC and Fox, and delivered the keynote address at the American Banker's Symposium.
Contact
Dr. Dan Geller
415-891-3093
[email protected]
SOURCE Analyticom
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