Glossary of Terms
ALLL (Allowance for Loan and Lease Losses) – Originally referred to as the “reserve for
bad debts,” a valuation reserve established and maintained by charges against a bank’s
operating income. It is an estimate of uncollectible amounts used to reduce the book value
of loans and leases to the amount a bank can expect to collect. The ALLL is the bank’s most
critical quarterly calculation.
ASC 310-10 – FASB codification that provides general guidance for receivables. Formerly
SFAS No. 114, ASC 310-10 applies to all loans that are individually identified for evaluation,
uncollateralized as well as collateralized. A loan is defined under FASB ASC Topic 310-10 as
the contractual right to receive money on demand or on fixed or determinable dates that is
recognized as an asset in the creditor's balance sheet. FASB ASC Topic 310-10 provides
guidance on evaluating loan losses for specific loans for which the risk characteristics are
unique to an individual borrower.
ASC 450-20 – FASB codification that provides general guidance for receivables. Formerly
SFAS No. 5, analysis is used for pools of homogeneous loans and applies to all loans, except
for those that are recorded at fair value and those that are deemed impaired and
individually assessed under FASB ASC Topic 310-10.
CECL (Current Expected Credit Loss) – An estimate of all contractual cash flows not
expected to be collected from a recognized financial asset - or group of financial assets - or
commitment to extend credit.
Cohort – An expected loss model that groups loans outstanding at the beginning of a loss
accumulation period by relevant risk characteristics, measures losses accumulated on each
group (cohort) over the following loss accumulation period, then averages the quarterly
results over a loss cycle period for an expected loss rate for each cohort.
Credit Risk – The risk of loss of principal stemming from a borrower's failure to repay a
loan or otherwise meet a contractual obligation.
Expected Losses – A current estimate of all contractual cash flows not expected to be
collected
FASB’s Credit Impairment Project – An initiative by the Federal Accounting Standards
Board designed to better align the accounting rules to more accurately reflect how investors
view the economics of lending and its inherent credit risks and resulting in a revised
standard for accounting for the allowance, Current Expected Credit Loss (CECL).
FDIC (Federal Deposit Insurance Corporation) – An independent agency of the federal
government, the FDIC seeks to preserve and promote public confidence in the U.S. financial
system by insuring deposits in banks and thrift institutions for at least $250,000; by
identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting
the effect on the economy and the financial system when a bank or thrift institution fails.
Federal Reserve – The central bank of the United States. The Fed, as it is commonly called,
regulates the U.S. monetary and financial system. The Federal Reserve System is composed
of a central governmental agency and Board of Governors in Washington, D.C., and twelve
regional Federal Reserve Banks in major cities throughout the United States.
Interagency Policy Statements – The Office of the Comptroller of the Currency, the Office
of Thrift Supervision, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, and the National Credit Union Administration combine to
issue guidance on the ALLL as well as other banking-related topics.
Loss Emergence Period (LEP) (also, Loss Discovery Period [LDP] and Loss
Confirmation Period [LCP]) – The average time for a specific loan type between when loss
events occur and when losses are confirmed, that is, charged off.
Loss Given Default- The percentage of defaulted loan balance that is ultimately charged off.
Loss Migration – Calculating loss rates based on the migration of losses back through the
history of a loan in order to assign the losses to risk-stratified segments. Loss migration
allows for a more granular analysis of loss rates based on risk characteristics.
Market Risk - The possibility for an investor to experience losses due to factors that affect
the overall performance of the financial markets.
Migration Analysis – the allowance estimation methodology the purpose of which is to
determine, based on the bank's experience over a historical analysis period, the rate of loss
the bank has incurred on similarly criticized or past due loans. The most basic migration
analysis, fixed loss migration, looks at a single point in time and makes determinations
based on events happening to the loans that existed at that point. More sophisticated forms
track the loss experience on a rolling population of loans over a period of several years.
Model – A set of ideas and numbers that describe a particular state. Relative to the
allowance, any of several methods for estimating.
Model Validation – Validation of the ALLL process to mitigate process risk that can exist in
the data inputs; model assumptions; model methodologies; logic, code and limitations of the
model estimation process; and model applications.
OCC (Office of the Comptroller of the Currency) – A federal agency that charters,
regulates, and supervises all national banks and federal savings associations as well as
federal branches and agencies of foreign banks. The OCC is an independent bureau of the
U.S. Department of the Treasury. The mission of the OCC is to ensure that national banks
and federal savings associations operate in a safe and sound manner, provide fair access to
financial services, treat customers fairly, and comply with applicable laws and regulations.
The President, with the advice and consent of the U.S. Senate, appoints the comptroller to
head the agency for a five-year term. The comptroller also is a director of the Federal
Deposit Insurance Corporation and NeighborWorks® America.
Operational Risk – The risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events, as defined by the Basel Committee of 2004. It
is an area of recognition and focus for regulators as well as bankers.
Probability of Default - The probability the loans in a certain risk-stratified segment will
default expressed as a percentage.
Probability of Default/Loss Given Default Methodology (PD/LGD) – As a method for
estimating the allowance, a form of migration analysis that combines the calculation of the
probability of loans experiencing default events with the losses ultimately associated with
the loans experiencing those defaults. The PD component of the formula represents the
probability the loans in a certain risk-stratified segment will default expressed as a
percentage. The LGD component is the percentage of defaulted loan balance that is
ultimately charged off. Multiplying one by the other gives the bank its loss rate, which is
then applied to the loan portfolio balance to determine expected future losses.
Q-factors – Internal and external qualitative and environmental factors the bank has
determined applicable to account for losses beyond its historical experience and quantified
as part of its ALLL estimation process.
Shadow Loss Analysis (also, Dual Loss Analysis) – A separate and different loss model, or
the same model with different assumptions, used by the bank in addition to its existing
model as a check on the existing model.
Stress Testing – An analysis conducted under unfavorable economic scenarios designed to
determine whether a bank has enough capital to withstand the impact of adverse
developments. Stress tests are either carried out internally by banks as part of their own
risk management or by supervisory authorities as part of their regulatory oversight of the
banking sector. These tests are meant to detect weak spots in the banking system at an
early stage, so that preventive action can be taken by the banks and regulators.
TDR (Troubled Debt Restructuring) – A debt restructuring is considered a TDR when the
bank, for economic or legal reason related to the customer’s financial difficulties, grants a
concession to the customer that it would not otherwise consider. The concession can stem
from an agreement between the bank and the customer or be imposed by law or court.
Vintage – An expected loss model that tracks homogeneous loans on the basis of calendar
year or quarter of origination, measures losses accumulated on each group (vintage), and
applies the expected cumulative loss to the outstanding vintages.