Model expected credit loss for CECL with MATLAB

Current expected credit loss (CECL) is a new standard created by the Financial Accounting Standards Board (FASB) for regulating credit loss reporting of financial institutions. It governs balance sheet accounting of loans, mortgages, and other credit instruments and is due to come into force in 2021, primarily affecting U.S. reporting. CECL incorporates a credit impairment charge on affected assets, resulting in higher provisioning expenses.

Expected credit loss (ECL) is a probability-weighted estimate of credit losses during the expected life of a financial instrument. The estimation method requires point-in-time (PIT) projections of probability of default (PD), loss given default (LGD), and exposures at default (EAD). CECL model types available with MATLAB® include:

  • Stochastic modeling of default and recovery
  • Macroeconomic modeling and forecasting
  • Scenario generation
  • Instrument pricing and risk sensitivity
  • Automated reporting, incorporating PIT model and data selection

See also: econometrics and economics, Monte Carlo simulation, credit scoring model, risk management solutions , IFRS 9

A Practical Guide: Modeling Financial Risk with MATLAB