Title page
Contents
Abstract 2
1. Introduction 3
2. Overview of the Current Expected Credit Loss Standard (CECL) 5
2.1. ALLL under CECL 7
2.2. Sources of Variation in ALLL under CECL 8
2.3. Uncertainty in Macroeconomic Forecasts 9
3. Empirical Investigation 10
3.1. Data 11
3.2. Mortgage Default Model 12
3.3. Forecast Methodologies 16
4. Results 18
4.1. Incurred Loss Standard and CECL with Perfect Foresight 18
4.2. Imperfect Forecasts 21
4.3. Alternative Durations of the Forward-Looking Period 29
4.4. Alternative State Analysis 31
4.5. Analysis on Counties with Inelastic Housing Supply 33
5. Conclusion 35
References 37
Appendix A 41
Appendix B 42
Table 1. Measures of Pro-cyclicality (2004-2012) 20
Figure 1. Delinquencies, ALLL, and Provisions as a Percent of Total Assets, Bank Holding Companies, 2001-2016 6
Figure 2. Variation and Error in Unemployment Rate Forecasts 10
Figure 3. Cumulative Default Rate by Refreshed LTV 15
Figure 4. Cumulative Default Rate by FICO® Score 16
Figure 5. ALLL under Incurred and CECL with Perfect Foresight 19
Figure 6. Alternative Forecast - Optimistic 22
Figure 7. Alternative Forecast - Autoregressive 24
Figure 8. Alternative Forecast - Limited Foresight 26
Figure 9. Comparison of Alternative 2-Year Forecasts with 3 Month Revisions 27
Figure 10. Comparison of Alternative Forecast Windows 31
Figure 11. Comparison of Forecasts for Texas and Michigan 33
Figure 12. Comparison of Alternative Forecasts by Home Supply Elasticity 35