Modeling Implications of FASB's proposed changes, 28 Mar 2013

Next Tuesday, April 2nd, I will be participating in a webinar on FASB's proposed changes to the Allowance for Loan and Lease Losses.

FASB is proposing that loss reserves will now be based upon a lifetime loss calculation, be forward-looking including macroeconomic scenarios, and use discounted cash flows based upon the effective interest rate of the loan. I will be discussing the modeling implications of these and other criteria. A little like a Basel II model, a little like a stress test model, and elements of a cash flow model - this will not be your old roll rate model.

If you have a 5-year auto loan portfolio, expect roughly 3x higher loss reserves. In the words of one FASB watcher, "This is going to happen."

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