What is the Purpose of a CECL Model Validation?

Accounting Standards Update 2016-13 introduced the current expected credit loss (CECL) methodology for estimating loan losses and has made it necessary for many banks and other financial institutions to implement new financial models to calculate the allowance for credit losses for financial reporting. Now that the CECL implementation date has passed, financial institutions should consider validating their CECL models.

Why Choose Bank Advisors for CECL Model Validation?

Bank Advisors provides a cost-effective approach to CECL model validation to manage model risk and satisfy regulatory expectations. Whether you’re running a model developed in-house or from a third party, Bank Advisors’ experts will verify that your model methodology is being applied appropriately, evaluate the data input sources, and ensure that the model calculations and results are accurate.

What Does the CECL Model Validation Accomplish?

According to SR11-7 issued by the Federal Reserve and OCC, a comprehensive CECL model validation has the following three core elements.

  • Evaluation of Conceptual Soundness – Bank Advisors' team will evaluate the quality of the model design and construction and review the documentation supporting the methods used and the variables selected for the model.
  • Ongoing Monitoring – We will confirm that the CECL model is appropriately implemented and is performing as intended.
  • Outcome Analysis – We will compare the outputs of the CECL model to the corresponding actual outcomes to evaluate the model’s performance through back-testing or other analytical testing techniques.