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Financial Analytics

 
Copyright © 1994-2008 Financial Analytics
Unexpected Losses
When actual losses exceed the Allowance for Loan & Lease Loss (ALLL) provisions the equity of the institution is eroded.  So financial institutions are required to set equity capital based on the unexpected losses that exceed the expectations.

Using PortfolioView management can concentrate on the policy aspects of capital allocation rather than be involved in the details or complexity of its estimation.  True economic capital can be allocated to the entire portfolio or any segment ranging from individual transactions to entire business lines.

Unexpected Loss Rates for Select Future Terms

By Risk Level

Risk Rating

Year 1

Year 2

Year 3

Year 4

Year 5

Life of Pool

1

0.0625%

0.1083%

0.1753%

0.2253%

0.2603%

0.4090%

2

0.4456%

0.6613%

0.7537%

0.7899%

0.8053%

0.8597%

3

0.0386%

0.0650%

0.1407%

0.2435%

0.3442%

0.6704%

4

0.1685%

0.3245%

0.5132%

0.6867%

0.8228%

1.1418%

5

0.8101%

1.3122%

1.7962%

2.0969%

2.2658%

2.5017%

6

1.8053%

2.7705%

3.2587%

3.4984%

3.6202%

3.7840%

7

7.0214%

7.9625%

8.5718%

8.8461%

8.9678%

9.1000%

 

 

 

 

 

 

 

Rather than derive these estimates through unrelated processes, PortfolioView provides measures for both types of losses as part of a single analysis.  In addition, PortfolioView employs a consistent unified approach for measuring these losses across all commercial and consumer segments.

The economic capital so determined is a more appropriate measure than arbitrary regulatory requirements as it takes account of obligors' credit quality, benefits of diversification and effects of concentration.