Model validation is an important part of getting comfortable with CECL results because model performance tends to deteriorate over time as borrower behavior, institution-specific exposure and market conditions change. This is especially true in times of economic change and volatility. While back-testing against actual results is often helpful, it has significant limitations. When chosen wisely, benchmarking or challenger models can help address the limitations of back testing and provide management with insight into CECL results and catch model deterioration early.
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