How far have banks got to with meeting requirements for IFRS 9 with their credit risk models?

Now we definitely can say that majority of banks’ credit risk models have fully met the requirements for IFRS 9, as annual reports for 2018 were prepared and audited by external auditors. IFRS 9 model validation is part of usual audit procedures. Another question is that IFRS 9, as the majority of other accounting standards, does not cover all aspects of modelling and models with quite different approaches to parameters, time periods, sources of information etc. can generate different results though all these models are calculated in full compliance with general requirements of IFRS 9. For 2019-2020, it is a major task of regulators and auditors to promote and ensure aligned implementation practices that would foster the comparability of IFRS statement across the financial institutions.

What impact could an unstable credit risk model have on your bank?

Unstable risk models add volatility to the financial result, confuse investors, rating agencies, shareholders or other users of financial reports. Subsequently, management decision-making process would deviate from business as usual, being forced to address and mitigate such “reporting volatilities”. In general,  IFRS 9 forward looking approach in provisioning and macroeconomic parameters were introduced in order to strengthen the reflection of market environment in credit institutions reporting. Some volatility is not critical, but as it always comes from IFRS rules: only reasonable changes should be reflected in general ledger. Provisioning is, first of all, a reflection of credit risk not market conditions. The result of unstable credit risk model can be a loss of confidence from major stakeholders.

What do banks need to consider so that they are working towards improving the stability of their credit risk models used for IFRS 9?

The most important task now is testing how the models work on the medium and long run. New disclosures under IFRS 9 allow comparing provisioning figures, quality of assets among banks of similar profile, among competitors as well. Financial reports have become more transparent in the frame of credit risk disclosure on one hand; on the other hand, significant disparities when comparing credit institutions can be a result of specific credit risk model used. As analytics of financial reports require some standard approaches rather than specific ones, some banks will change their approaches and models will inevitably be aligned to the best practices.

What solutions are banks turning to in order to optimise IFRS 9 credit risk modelling? 

The solutions are setting up internal process of risk models validation, applying the same basic parameters for IFRS 9 and Basel models, simplifying and organising a clear process of calculation, validation and reporting by segregation of duties. For small and medium sized banks that use significant external data in calculating PD of their clients, best way forward is to efficiently organize the upload of external parameters and focus on quality of the data used.

What would you like to achieve by attending the 7th Annual Advanced Credit Risk Modelling Under IFRS 9?

Nowadays the volume of requirements to financial institutions is growing rapidly. Regulators, auditors, rating agencies use different methodologies to valuate banks’ activities. It is becoming of great value to have an opportunity to join a single knowledge-sharing platform with other leading financial institutions.

Open dialogue with members of Basel Committee, ECB, auditors and representatives of largest European banking groups on the issue of risks measurement offers the possibility to provide feedback to the regulators on the effectiveness of adopted laws. In the same time, we can share with the financial community our view on how particular changes in banking regulation directly or indirectly affect the work of international development institutions, representative of which International Investment Bank is.