Dalton T. Sirmans and Gus Alexander
Under the current incurred loss model for determining the ALLL, adjustment factors include changes in national and local economic and business conditions over the look-back period of the model. Under the coming CECL model, the bank will be required to forecast economic factors.
MST polled bankers to find out which economic data they use in their calculations and how they use that data. Among the reports from the banks we polled:
- They use the Beige book for high-level reports on various economic sectors in their areas.
- They employ loan officer reports to assess the local economy.
- They consider national data on changes in GDP, housing and employment from quarter to quarter.
- They decide if additional qualitative economic factors should be applied.
- They use their economic data to estimate the ASC 450-20 portion of their ALLL.
Do they consider the economic data they employ useful, effective? Among the answers were that Q-factors are subjective and easily changed or manipulated, and some national data is not useful because it doesn’t apply to their markets.
As the factors which determine the production, distribution and consumption of goods and services, economic data are critically important. Economics-based decisions typically consider a large amount of data for quantifiable estimates. As such, economic data provide measurable, objective information. And while our regulators and FASB always include economic considerations in their guidance, few banks have an economist on staff or access to available economic expertise.
Six key measures of economic activity:
- Real gross domestic product
- Nominal gross domestic product
- Unemployment rate
- Nominal disposable personal income
- Consumer price index
Four key aggregate measures of financial conditions:
- S&P/Case-Shiller U.S. National Home Price Index or House Price Index
- Commercial real estate prices
- CBOE Volatility Index
- Dow Jones Industrial Average, S&P 500, Russell 2000
Six key interest rate measures:
- 3-month T-bill
- 5-year T-bond
- 10-year T-bond
- 10-year BBB corporate security
- 30-year mortgage rate
- Prime interest rate
The Federal Reserve Economic Data (FRED) maintains more than 247,000 economic series from 79 different sources. It is available to banks in graphical and text formats and can be imported to a database or spreadsheet.
In applying FRED, the bank can compare national data to institutional data: internally generated, from the FFIEC and from peer banks. The bank should also look for correlation between national and local economics and such internal considerations as lending policies, loan profiles and volumes, problem loan trends and credit concentrations.