IFRS 9 overview
International Financial Reporting Standard 9 (IFRS 9) came into force on the 1 January 2018. With it came a principle change in how credit risk loss allowances were calculated for recognition on the balance sheet. The new standard requires to losses to be recognised on an expected basis, unlike the incurred method as directed under the IAS 39 approach. The level of recognition requires lifetime expected losses for accounts deemed to have experienced a significant increase in credit risk since origination and 12 months of expected loss for all other accounts.
This requirement brought with it the need for greater sophistication in modelling approaches and, for some organisations, the need to develop new analytics functions.
We were involved in over 20 IFRS 9 project either developing, validation or advising. Through this we gained a deep understanding of the methodologies available, key decisions to drive the level and volatility of allowances and observed challenges of development and implementation. We are focussed on supporting our clients with post implementation challenges such as production of value-add reporting, model monitoring, governance and ongoing maintenance.
We have found that a new approach for MI needs to be considered for IFRS 9 given the increased number of moving parts and the use of Forward Looking information for Loss Emergence.
In addition, we also feel that there are significant benefits to be gained through the utilisation of the model in a range of other capacities, these include:
- Return optimisation – the lifetime risk view provided from the IFRS 9 models can be used in a lifetime returns engine to drive optimal acquisition decisions and ensure that risk vs reward are aligned for all approvals. This includes the development of risk based pricing and cut-off models
- Forecasting and stress testing – the ability to model the risk evolution with varying economic scenarios allows the output to be used to forecast both impairment and RWA expectations of the life of all assets and with adjustments can also accommodate new business expectations. The inclusion of severe economic scenarios also allows the same model to be utilised for stress testing purposes
- Portfolio monitoring and reporting – the availability of the granular lifetime estimates enables detailed forward looking reporting to be produced for committee MI packs. These add significant information to standard arrears measures and can provide early warnings of emerging risks or risk appetite breaches.