Article
Q-factors and forecasting for basic entities - your questions answered
Key takeaways:
- Complexity of forecasting should be consistent with complexity of method
- Incorporating time-series forecast may not be necessary
- Can be a simple adjustment after historical loss calculation
Key takeaways:
- Don’t need to be “boxed” into any specific factors, use what impacts your portfolio the most
- May not need to use any qualitative factors if forecasting is incorporated into model
- Understand how your market compares to national metrics.
Key takeaways:
- Q-factors may make up a large portion of CECL estimate if historical losses are low
- Changes in q-factors are a key factor in volatility of 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.
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