Why you should consider using a qualitative scoring matrix

Banks and credit unions often cite the qualitative and environmental factors as one of their biggest challenges within the allowance for loan and lease losses (ALLL). During a recent webinar, Sageworks consultants discussed how to document qualitative factors. In addition to ensuring directional consistency, another consideration for justifying adjustments is to use a qualitative scoring matrix, as discussed in the clip below.

From the video:

Another way of documenting and applying the qualitative factors is to consider a qualitative scoring matrix. We have some snippets and examples from our ALLL solution up on our screen at this time. Essentially, the goal is to develop this qualitative scoring matrix and pick trend selections. As you see on our solution, I can select improvements: slight improvements, same, slight decline, decline, etc. You’re able to pick those and assign values to them, and you would then be more objective.

What’s an example to make this sound more clear? Well, imagine your economic risk factor; the economic qualitative factor you have. Rather than just saying, “Yeah, I’m going to put 10 basis points on that and make that happen,” or using that as a filler, the goal is to have a driver. As in, a piece of data or multiple pieces of data that back that. Now, I’m using the economic risk factors in my example because it’s the most common one used, it’s the most common one understood and has an almost agreed upon supporting data point. For example, unemployment index for your given area can be very supportive of that. So if that’s your key indicator, you could look at unemployment index and see it’s dropped. Therefore, it is an improvement, and you would then go and pick an improvement trend, which automatically has a value tied to it. It takes away that subjectivity part. You can say, “Oh, the trend of my data went this way, I saw it the same direction and it’s very clear.”

Now, you have to develop that matrix and keep that matrix locked in. If you go in and adjust values to the matrix over time, you’re making it more subjective because you’re altering it. It’s important to create it and keep it that way going forward. Considering a qualitative scoring matrix can be a very helpful way to document, defend and help limit the subjectivity that we said was a very big obstacle.

For more on how to add objectivity and directional consistency to the qualitative factors, download the whitepaper on qualitative risk factors.