Expected Loss

Appropriate provisioning that reflects expected credit losses can accurately represent true earnings by matching income and losses.

However, current methods of provisioning for Allowance for Loan & Lease Losses (ALLL) are lagged processes as they are based on identified non-performing exposures. Since non-performing loans are but a small fraction of a typical banking book, this approach ignores the substantially larger segment of performing loan migrations and is therefore liable to underestimation of ALLL and overestimation of true earnings particularly in a deteriorating portfolio.

Cumulative Expected Loss Rates for Select Future Terms
By Risk Level
Risk Rating	Year 1 Loss	Year 2 Loss	Year 3 Loss	Year 4 Loss	Year 5 Loss	Life of Pool Loss
1	0.0182%	0.0944%	0.1763%	0.2518%	0.3194%	0.5922%
2	0.2441%	0.4226%	0.5872%	0.7425%	0.8820%	1.3809%
3	0.0499%	0.2020%	0.4106%	0.6254%	0.8174%	1.4394%
4	0.2644%	0.6973%	1.1389%	1.5077%	1.7875%	2.4554%
5	1.1128%	2.9280%	4.1715%	4.8701%	5.2498%	5.7956%
6	6.0991%	9.5327%	11.1238%	11.8600%	12.2134%	12.6341%
7	36.7315%	42.3241%	43.6558%	44.0741%	44.2321%	44.3754%

In contrast to the lagged historical basis for provisions, PortfolioView calculates future expected losses across all risk categories based on the embedded information of loans before they are identified as non-performing.

The system facilitates rapid computation of loss rates for the full spectrum of risk ratings that include both performing and non-performing categories. The loss rates can be generated for any future period to match any lending term and for the life of the pool.

As a predictive tool, PortfolioView provides an early warning of developing losses and a profile of these losses.