Estimating Credit Losses: Evaluating Loss Emergence Period and Qualitative Factors

As financial depository and lending institutions aim to estimate their credit losses, one thing is true: the process is inherently subjective. All too often, a financial institution’s methodology for estimating credit losses relies too heavily on mathematical calculations, neglecting to account for external economic conditions, the company’s management decisions or credit exposures—factors that must be thoughtfully evaluated.
Considering that loan portfolio quality is a critical accounting estimate, it bodes well for financial institutions to ensure their credit loss approximations are, in fact, best estimates.
A holistic approach to loan loss estimates must include careful consideration of the loss emergence period and qualitative factors.

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