A manager just spun me this calculation of cost of credit on a loan portfolio:
(ExpectedLossNow - ExpectedLoss12monthsprior)
/12monthAverageOutstanding
This doesn't make any sense since if your EL was higher last year, you'd have a negative cost of credit, though that hasn't been the case this year as credit conditions have worsened.
Another alternative is
(12monthsNetChargeoff +(ALLLNow-ALLL12monthsprior))
/12monthsAverageOutstanding
Any thoughts on how to calculate cost of credit?
(ExpectedLossNow - ExpectedLoss12monthsprior)
/12monthAverageOutstanding
This doesn't make any sense since if your EL was higher last year, you'd have a negative cost of credit, though that hasn't been the case this year as credit conditions have worsened.
Another alternative is
(12monthsNetChargeoff +(ALLLNow-ALLL12monthsprior))
/12monthsAverageOutstanding
Any thoughts on how to calculate cost of credit?