For a lender, the provision comes from credit models and committee judgements; the workpapers prove it. An agent can reconcile the loan book to the ledger, check model inputs and staging, build the movement analysis and draft the workpapers. Credit risk owns the models, the provisions committee approves overlays and individually assessed loans, and finance signs the journal.
What goes into loan loss provision workpapers, and who owns them?
Most lenders provide for expected credit losses: a forward-looking estimate built from the probability that a borrower defaults, the loss if they do and the exposure at that time. Loans are grouped into stages by how much their credit risk has worsened since they were made, and the stage determines whether the provision covers twelve months of expected losses or the life of the loan. Large or unusual loans may be assessed individually. Management overlays adjust model results for things the models do not capture.
Credit risk owns the models. Finance owns the numbers in the accounts. A provisions committee, often chaired by the CFO or CRO, approves overlays and individually assessed provisions each quarter. Model risk is supervised in most banking markets, and auditors test provisions in depth. The workpapers are where all of this meets.
The agent is not a credit model and should never be used as one here. It works around the models, inside the bounds set out in AI agents for finance.
What are the steps, and who acts at each one?
- Agent, depth 1: reconciles the loan book. Loan-level balances in the model input file against the general ledger, by product. Differences are listed before anything else.
- Agent, depth 1: checks inputs. Missing or stale ratings, collateral values past their revaluation date, days past due inconsistent with payment history.
- Agent, depth 1: checks staging. Applies the approved staging criteria (days past due, rating deterioration, watchlist, forbearance) to each loan and compares with the stage the model assigned. Mismatches go to credit risk.
- Person, credit risk: runs the models and resolves mismatches. The agent does not run or change models.
- Agent, depth 2: builds the movement analysis. Opening provision, new lending, repayments, stage transfers, changes in risk parameters, write-offs, overlays, closing. Each line reconciled.
- Agent, depth 2: prepares committee papers. Overlays proposed by credit risk with their rationale, individually assessed loans with the evidence the credit team provided, and the period's movements.
- Person, provisions committee: approves overlays and individual provisions.
- Agent, depth 2: drafts workpapers, journal and disclosure data. Parked.
- Person, finance: approves the journal and signs the workpapers.
| Step | The agent does | Depth | Stays with a person |
|---|---|---|---|
| Reconcile book | Model input to ledger | 1 | Resolving differences |
| Input checks | Finds stale or missing data | 1 | Credit risk corrects |
| Staging check | Compares to criteria | 1 | Credit risk decides |
| Model run | Nothing | none | Credit risk |
| Movement analysis | Builds and reconciles | 2 | Nothing new |
| Committee papers | Assembles | 2 | Committee approves |
| Workpapers and journal | Drafts and parks | 2 | Finance signs |
What does the movement analysis show?
For an illustrative mid-sized lender, the opening provision is 20,000,000. The agent attributes the change line by line: new lending adds 1,500,000, repayments release 800,000, loans moving from the twelve-month stage to the lifetime stage add 2,200,000, updated economic scenarios add 600,000, write-offs use 1,100,000 and an overlay for a stressed sector adds 500,000. The closing provision of 22,900,000 must equal the model output plus approved overlays and individual provisions, and the ledger balance after the journal. If any of the three disagree, the paper does not go to committee.
Which controls matter, and what evidence do they leave?
Book completeness. Every loan in the ledger is in the model input, and vice versa. Evidence: the reconciliation with exceptions.
Staging consistency. Evidence: the list of loans where criteria and model disagree, and the resolution.
Overlay governance. Each overlay has an owner, a rationale, a calculation and an expiry. Evidence: committee minutes and the overlay register.
Preparer separate from approver. The agent drafts; the committee and finance approve. The principle is the same one that stops one agent both preparing and approving a payment. Evidence: identities on every approval.
Model version. Evidence: the model version and its validation status on each run.
What should you measure?
- Ledger-to-model differences at each quarter end.
- Staging mismatches found, and how many credit risk changed.
- Overlays by size and age; long-lived overlays suggest a model gap.
- Provisions against actual losses, looked back over time.
- Audit findings on provisions.
Where does it usually go wrong?
Stale collateral. Property values from years ago support a low loss estimate. The agent's input check should flag valuations older than policy allows.
Overlays that never expire. An overlay added for one event remains long after. Give each an expiry date and make the agent list those due.
Forbearance not flagged. Restructured loans are not marked in the system, so staging misses them. The agent can find likely forbearance from changed payment schedules and send them to credit risk.
The workpaper does not reconcile. The movement analysis does not sum to the change in the balance. The agent's reconciliation must close before the paper goes to committee.
The same discipline, simpler, applies to trade debtors in bad debt provision workpapers. The tax treatment of provisions feeds into corporate tax provision workpapers.
Questions people ask
Can the agent propose overlays?
It can show where model results differ from recent losses or where inputs are weak. Proposing and justifying an overlay is credit risk's job.
Is this agent itself a model under model risk rules?
If it only reconciles and assembles, it is usually treated as a tool rather than a model. If it estimated anything used in the provision, that would change; confirm with your model risk function.
How often should the workpapers be prepared?
At each reporting date. Many lenders run the reconciliation and staging checks monthly so quarter end has fewer surprises.