Could you please expand on how to use multiple economic scenarios to calculate expected credit loss?

For risk management purposes, every bank uses multiple economic scenarios. It forms part of the risk management armoury. However, the risk management purpose is to identify risks and risk drivers not captured by other more conventional tools like VAR. This is different from what the IFRS9 demands. For example, there is no need to use best or worst case scenarios and one must assign probabilities for each scenario. Instead, the standard stipulates an unbiased and probability weighted calculation. Implementing this requires many steps and strong governance. One has to identify the macro-factors that are affecting his credit portfolio and then define the scenarios and the time horizon of each. Next probability weights would have to be calculated or guess estimated. The impact on staging is a further complication that is not present in normal scenarios. The technical complication is very high and for banks that have limited resources or idiosyncratic business plans, the burden would be significant.

What are the conceptual problems with IFRS 9 and what can banks expect from one-off capital hits in 2018?

When Basel issued their guidelines for capital calculation they took into account the fact that smaller lenders may not have the in house capabilities for advanced modelling techniques. By contrast there is no such provision for IFRS9 ECL calculations. In addition, even though the standard requires a multiple scenario approach it does not get into any detail or approach. It seems that judgment would be the word most widely used when doing these calculations. This means that the capital hits banks would suffer would be uneven and non-representative of their underlying risks. For some portfolios that exhibit non-linearity, doing this calculation would be very costly. This may result in a redefinition of many business lines. This would create a systemic problem as more market participants align their business models and fewer are taking non-linear positions.

How can a bank maintain consistency in macroeconomic forecasts?

There is a variety of sources for scenarios and macroeconomic forecasts. One could use for example the scenarios/forecasts proposed by the regulator but these are based on the assumption that the bank is exposed mainly to macroeconomic events particular to that country. In other words, although they may be consistent for a country forecast, they are not appropriate for banks that are globally exposed. A way out of this is to use the assumptions that are built in the ICAAP submission. Getting the probabilities of each scenario consistent involves judgement, especially for forward looking estimates in the middle of Brexit. The Brexit scenario is a typical case of a “known unknown”. We are pretty sure that is going to happen but have no clue on how the systemic change would affect the economy and the banking sector. Nor do we know what exit deal would be struck but we need to forecast the effects of that unknown deal.

What are the best practices on validation and backtesting models and who should be responsible for backtesting these models?

Backtesting models is a very nice and easy to understand theoretical concept. However, as always, the devil is in the details. The IT, data, and modelling issues required for even the simplest backtesting are considerable. Backtesting should ideally be done by a separate unit from the one that is implementing it. As this is not always possible due to lack of knowledge or skills or other resources, the best safeguard is to have a robust governance process in place and accountability at every stage of the decision process.

What would you like to achieve by attending the 5th Annual Credit Risk Modelling under IFRS 9 Conference?

Sharing information and trying to identify best practices and intelligent practical solutions for the many conceptual and practical problems posed by the implementation of the new standard would
be, I hope, a major deliverable of the conference. The industry needs more information sharing and transparency if we are to serve our shareholders and fulfil our obligation to society.

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For more information, contact:
Yiota Andreou


Ahead of the 5th Annual Credit Risk Modelling under IFRS 9 Conference, we spoke with Andreas Koutras, Head of Portfolio Risk Management at FBN Bank about the conceptual problems with IFRS 9 and what banks can expect from one-off capital hits in 2018.

Previous Attendees Include:
ABN Amro Bank
Banco Espirito Santo
Bank of England
Bank of Ireland
Barclays Bank
BNP Paribas
Ceska Sporitelina AS
Commonwealth Bank of Australia
Credit Agricole
Credit Suisse
Credito Trevigiano
Danske Bank


About the Conference:

This marcus evans event provides the opportunity to discuss and compare solutions to modelling challenges with other banks before implementation and to benchmark their approaches to validation. The conference will also cover the most up-to-date expectations of supervisors. The 5th Annual Credit Risk Modelling under IFRS 9 Conference will take place from the 29th until the 30th of June 2017 at Hilton Canary Wharf in London, United Kingdom.

Copyright © 2017 Marcus Evans. All rights reserved.

Practical Insights From:

Erste Group

Deutsche Postbank



Lloyds Banking


FBN Bank

BNP Paribas



Habib Bank AG Zurich


Clydesdale Bank


About the speaker:

Andreas is the Head of Portfolio Risk at FBN Bank UK. He has extensive quantitative and investment banking experience across Europe and Middle East. He has started his financial career with Lehman Brothers were he was Fixed Income quantitative and derivatives modeller. He moved in the world of exotic derivatives and structured products producing innovative asset and liability solutions for clients across Europe. In 2001 he spend a year in India developing an equity derivatives platform and trading Indian stock indices and derivatives before moving to the structuring desk of Bank of Montreal in London. He subsequently headed the Interest Rate and Hybrids Structuring for CALYON in London and marketed Fixed Income products into the Middle East, North and South Africa and Europe ex-France. He also covered Central banks and government debt agencies on liability management. He joined Royal Bank of Canada in 2008 as derivatives structurer responsible for interest rate solutions. At ITC markets he advised on central banks and the peripheral debt crisis. Andreas is frequently quoted by Bloomberg, and newspapers with regards to the debt crisis in Europe. He has also given many public presentations and talks on the debt crisis and writes for the “Greek economists for reform”.
Andreas studied Astrophysics and advanced Mathematics at London University and Cambridge. He has a PhD from London University on Einstein’s General Theory of relativity and he has written articles in referred scientific journals. Andreas spent two years as a postdoctoral fellow first in Jena, Germany with the Max Planck Gesellschaft and later as a NATO fellow at London University.


The conceptual problems with IFRS 9 and what banks can expect from one-off capital hits in 2018




An interview with the Head of Portfolio Risk Management from FBN Bank

 Andreas Koutras, Head of Portfolio Risk Management at FBN Bank

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