Article
Q-factors and forecasting for complex entities - your questions answered
Sep 21, 2022 · Authored by Ivan Cilik, Matt J. Nitka
During our latest CECL Tuesday talk-through we answered submitted questions on Q-factors and forecasting for complex entities. This informative article reviews the questions we answered in our session.
Key takeaways:
- Complexity of forecasting should be consistent with complexity of method
- Incorporate forecasts that are most impactful to your institution and operating footprint
- Quantify the qualitative using min and max thresholds
Key takeaways:
- Don’t need to be “boxed” into previous 9 factors, use what impacts your portfolio the most
- Keep in mind what Q factors may be incorporated into your forecasts (changes in economic factors, delinquencies, etc.) to avoid double counting
- Understand how your market compared to national metrics
Key takeaways:
- Understand what metrics are impacting your future loss assumptions
- Understand how changes in your forecast impact your CECL estimate (i.e. stress-test!)
Key takeaways:
- Q-factors make up a significant portion of overall CECL estimate for a large quantity of entities, but not all.
- Changes in q-factors are key factor in volatility of the CECL estimate
- Can you support and document why your Q-factors make up a large percentage of CECL?
Key takeaways:
- Can be determined in a quantifiable way, but doesn’t mean it has to be (i.e. unemployment)
- Look at what caused large loss events to identify triggers
- Not all economic metrics impact every institution. Some portfolios are more correlated to certain metrics than others.
Watch our webinar here:
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