08 Sep An Example of Why Data Matters In CECL
An Example of Why Data Matters In CECL
By Adam Mustafa, Invictus Group President and CEO
Example: A bank has a significant concentration of its commercial real estate loans risk rated a 4. Those loans will have a range of debt service coverage ratios (DSCRs). Some will have DSCRs greater than 2 and deserve to be in a pool with a lower loss estimate, everything else being equal. Other loans will have thinner DSCRs, perhaps even closer to 1. Those loans should have relatively higher loss estimates. If the bank doesn’t have the data history to back up its estimates, it will end up erring on the conservative side, putting more than it needs in reserves.
The right external data, however, can help the bank optimize — and justify — its reserves.