LLR methodologyvaries from bank to bank. Banking regulators must ensure that banks have appropriate resources to counter and bear losses that arise from defaulters and non-payment by borrowers.To determine a proper allowance banks should periodically evaluate borrower profiles and pending payment of loans in their portfolio. The ALLL is determined and calculated at the end of each quarter. It may also be done more frequently if it is suggested by the loan review process. This is something that can’t be neglected since the bank or the financial institution’s reputation and image rest on it. This determines the strength of a bank and its long term existence. Economic conditions are also to be kept in mind during the whole process. The future can’t be predicted and that is why an estimate of the possible future losses needs to be made in order to plan a reserve for the same.
There are a few challenges that banks face with regards to allowance for loan and lease losses estimation. These challenges are as follows:
· The process is manual and time intensive.
· Proper documentation is necessary and producing that can be a tedious task.
· New accounting standards have to be incorporated as per FASB and federal regulatory bodies.
But these challenges need to be overcome by the banks and financial institutions even though it must be a bit of a task and hence, a good and reputed credit risk management company should be involved in looking after the entire process. Association with a credible company brings in more relief to the bank and the bank can thusly enjoy good reputation and management of their loans at present and in future.
Original Source :
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