Cash Flow Calculations

There are two distinct ways of calculating the CECL under the Cash Flow method depending on how the undrawn portion of a financial instrument is treated. They are:

• Calculation of CECL with Undrawn amount modeled within the Contractual Cash Flows
• Calculation of CECL with Undrawn amount treated separately and outside the Cash flow approach

The following sections detail the CECL calculation for accounts, both with and without undrawn amounts, as mentioned in the preceding sections.

CECL is computed by considering the cash flows and the Probability to default for the entire life of the instrument. The Contractual cash flows are adjusted for PD and LGD to compute the Expected Cash Flow (ECF). The values of Contractual Cash flow and Expected Cash flow are then used to calculate the Cash Short Fall.

CECL is computed as the Net Present Value of Cash Short Fall.

The Effective Interest Rate (EIR) is used for discounting while calculating the CECL.

Note:

The PD for the lifetime or until the maturity of the account is considered.

Assigning the PD Values for Each Cash Flow Date or Bucket

The PD assignment happens within the CECL run as part of the Cashflow or forward exposure methodology. The cumulative PD matching the account's Term structure ID, Account's Rating, or DPD, and the bucket number (period) is populated against the account's cash flow - based on the cash flow bucket.

Note:

If Cash Flows are provided as a download, via the stage account cash flow table, a single row for principal and interest cash flow each must be provided, on any cash flow date.