Global Credit Data’s second IFRS 9 benchmarking report confirms banks’ expected credit loss estimates vary by at least factor 4
Global Credit Data, a not-for-profit data-collection initiative jointly owned by more than 50 leading global banks, has today released its second IFRS 9 benchmarking report, with the results highlighting a need for a greater number of banks to participate in the benchmarking process.
IFRS 9 requires banks to estimate a one-year and a life-time expected credit loss (ECL). These measurements are expected to be responsive to macroeconomic developments and to include a forward-looking perspective. A level of variability is therefore to be expected, as ECL should also capture banks’ specificities.
However, results from the study – conducted in the summer of 2018 and supporting 26 international banks in finalising their IFRS 9 implementation – demonstrated a significant degree of variability of around factor 4. This suggests that the IFRS 9 framework has yet to stabilise.
“We remain in the early stages, however, the high level of variability in ECL figures under IFRS 9 is something the industry will need to analyse and address,” says Richard Crecel, Executive Director of Global Credit Data. “If banks don’t act, they may find the regulator acts for them – and imposes more restrictive standards than many would like.”
The question remains: how much variability is too much? And how should the industry go about standardising the approach to IFRS 9?
“We are not looking for a one-size-fits-all calibration,” says Daniela Thakkar, Methodology & Membership Executive, Global Credit Data. “Banks and regulators need to understand the potential effects of IFRS 9, and benchmarking will be a key tool in this regard. We hope this report will generate an industry-wide conversation and encourage financial institutions to participate in such benchmarking activities.”
As institutions develop more precise methods to improve future credit loss estimates, regulators and auditors will push for greater consistency. Global Credit Data, as part of its mission to help financial institutions better understand and model their credit risks, is leading the way in engaging and supporting banks towards this objective.
Click here to download the full report.