Another challenge is the nature of significant events, which possess a small probability of occurring, but which feature great disruption if they do. Known as black swan events, the integrated nature of the global economy means their impact can be transmitted ever faster (literally and figuratively) across the globe in a matter of days and weeks. The COVID-19 pandemic is an obvious example, likewise the financial crisis of 2008.
Regional issues, like Brexit or regional wildfires, for example, can have significant regional economic impact. These can have material impact on CECL results for large institutions, as well as smaller, localized ones.
For the forward-looking models that are a feature of CECL, these may need to be modified and adapted to recognize new, perhaps unanticipated, economic shocks. These models – which may use complex applications, or even only basic spreadsheets – will need to be managed and changed, often at short notice. Changes to these models will need to be managed and monitored to maintain the models’ accuracy, auditability, and transparency.
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