What is ALLL methodology validation?

A bank’s ALLL methodology must be validated according to the Interagency Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions.

Model validation is the set of processes and activities intended to verify that models are performing as expected, in line with their design objectives and business uses.

It also identifies potential limitations and assumptions, and assesses their possible impact. Model validation should be performed by staff with appropriate incentives, competence, and influence.

How does MST provide validation?

Former FDIC Subject Matter Expert Joe Watson is an authority on the ALLL. With 37 years of experience as an examiner, he knows the regulations and understands the requirements. Joe is uniquely qualified to fulfill this requirement for financial institutions.

Key Elements of Comprehensive Validation

An effective validation framework should include three core elements:

• Evaluation of conceptual soundness, including developmental evidence
• Ongoing monitoring, including process verification and benchmarking
• Outcomes analysis, including back-testing