IFRS 9 Impairment Models - A regulatory cost or a business opportunity?

The financial services industry has recently undergone a major change due to the introduction of IFRS 9 impairment requirements. This has come generally at increased costs due to either the redirection of internal resource or engagement of third parties to develop compliant models.

Calculation of IFRS9 Expected Credit Losses with Discounted Cash Flows

IFRS9 Expected Credit Losses (ECL) are commonly calculated as the sum of the marginal future expected losses in each period following the reporting dateusing PD, LGD and EAD components. ECL can also be calculated directly from expected future cash flows. This could be an attractive option for many short-term lenders, especially for those that cannot leverage existing PD, LGD and EAD models, as it requires developing a single cash flow model.

Banks cut budgets for maths and models as rules change

The FT covered a piece on a regulatory crackdown that it claims removes the key incentive for measuring risk – view the full article here https://next.ft.com/content/672e8d6a-1d63-11e6-b286-cddde55ca122  Here is our response - this certainly covers the impact for investment banks as rather than retail.  What BCBS have announced is that they are potentially withdrawing IRB treatments for exposures against large corporates and other banks.

Good regulation vs. rules with unintended consequences

Regulations that aim to increase understanding of risks for management, investors and the general public are effective, self-reinforcing and are likely to change emergent behaviour. Market wide stress testing initiatives have been particularly powerful in this regard – by requiring banks to consider explicitly the worst scenarios and publish the outcomes, the market has been driven to protect and plan for those events.

IFRS 9 - how to make the changes needed

The changes needed to meet the new IFRS 9 requirements are substantial and will require significant thought and effort by individual organisations and their advisors to develop a compliant solution that is right for them. Some larger, more complex and systemically significant organisations have been working on this for a number of years and still don’t have all of the answers