Adapting the investment and loan portfolio to the new three-stage impairment model requires the development of new risk metrics, their calibration/validation based on data that are as extensive and robust as possible, and uniform and strict application to the whole credit population. All this must be achieved by taking profit from risk parameters that banks already estimate and use (typically, for credit risk management purposes), aiming for maximum consistency and minimum duplication of effort. Moving from words to facts will prove an exciting – still complex - challenge.
Furthermore, moving from the old to the new system will trigger a huge change compared to current measurements. This will impact the banks’ profit and loss account – above all in the first year of application - and capital levels. Managing the changeover in a context where institutions are requested to increase and retain capital (also to avoid constraints on dividend distribution) will prove the most sensitive phase from a technical point of view, and paradoxically the one that banks will face – by definition – while still unexperienced with the new standard.
As is always the case, decisions must be driven by knowledge. It is a long road, but this paper is a small, important step in the right direction.
INDEX OF THE PAPER
- The new impairment model
- A preview of the main impacts
- Recognizing risk: first time adoption and transfer criteria
- Measuring lifetime expected loss
- Forward looking assessments
- How IFRS 9 will affect processes
- A possible work plan