Banks will need new data and techniques for forecasting expected credit losses when the revised IFRS 9 is introduced from 2018. Tony Clifford assesses the implications for risk reporting.
Banks face some significant data and systems challenges as they prepare to implement the new financial instruments accounting standard IFRS 9. Finance and credit risk functions will have to work closely together as much of the information needed to calculate expected credit losses (ECLs) for financial assets will have to be sourced from risk management systems. But compliance with IFRS 9 will often require forward-looking data beyond that currently used for risk management, necessitating the need to invest in new systems, processes and data.
It should be stressed that the 12-month loss allowance for stage 1 exposures is not the same as the Basel II expected loss capital requirement. Both the 12-month and lifetime ECL amounts are a “point in time” best estimate, rather than a “through the cycle” calculation using downturn losses in the event of default, as usually
required in regulatory capital models.