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Challenges surrounding disclosure of expected credit losses

Philippa Kelly, head of financial services at the Financial Services Faculty, looks at some of the challenges surrounding disclosure of expected credit losses. She explores where to expect comparability, key judgements to understand and the use of multiple economic scenarios, among other things.

In order to assist in the presentation of comparable disclosures it could be useful to develop a benchmark for how significant increase in credit risk is assessed and reported. This would give users further information about an institution’s risk appetite.

The requirement for the use of multiple economic scenarios in calculated expected losses under IFRS 9 requires a multitude of decisions to be made. Many institutions are still at the stage where models using multiple economic scenarios will only take the calculation so far, and PMAs are necessary. Whatever else happens, it will be important for banks to disclose how their approaches are being refined as they move away from PMAs.