Why CECL and ALM prepayment assumptions are not interchangeable

Prepayment behavior sits right at the intersection of credit performance and interest rate risk. It’s one of the few areas where accounting, lending, and balance sheet strategy all touch the same underlying loans, which is exactly where confusion tends to begin.

Most institutions are not trying to get this wrong. In fact, what you typically see is a reasonable process playing out. A CECL model is built using historical data, portfolio characteristics, and observed payoff behavior. Prepayment assumptions are developed, documented, and validated in that context. Over time, they become something the institution is comfortable relying on, and from there, it is a short step to reuse them.
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