IFRS 9 Methodology And Model Management Post Pandemic – It’s High Time To Pay The Piper!

IFRS 9 Methodology And Model Management Post Pandemic – It’s High Time To Pay The Piper!

By:
Mahim Mehra, Senior Risk Advisor, AxiomSL
Yoon Sik Ma, VP, Product Manager, AxiomSL

Preamble: Once Upon A Time, A Swarm Of Rats Arrived In Hamelin…
A famous legend dating back to the Middle Ages recounts how the terrified townsfolk of Hamelin hired the Pied Piper who promised he could banish the scourge of rats overtaking them. Piping an irresistible tune, he did just that, with terrible unanticipated consequences.

Readers may wonder… How does this tale apply to IFRS 9 methodology and model management post pandemic?

In this whitepaper, AxiomSL discusses the complex landscape of credit model management, IFRS 9 ECL compliance, and the impacts of the pandemic crisis, and explores how organizations can, unlike the hapless townsfolk of Hamelin, pay the piper promptly by taking a strategic approach now to IFRS 9 methodology and model management.

High Stakes For Banks’ Risk Management
Complying with the credit-risk analytics and credit-impairment requirements under International Financial Reporting Standard IFRS 9 has forced financial institutions to change how they organize, calculate, and examine their credit data. Organizations have had to reconcile data across risk, finance, and accounting functions. Furthermore, reconciling the CFO’s profit/loss perspective with the CRO’s risk/portfolios perspective has demanded that firms articulate and reconcile their data differently.

From a risk perspective, IFRS 9 can cause provisioning assessments to be more sensitive than previously because it includes multiple instances under which expected credit losses (ECL) must be assessed for lifetime or under volatile forward-looking scenarios. ECL relies upon point-in-time (PIT) estimates for default probabilities. This contrasts with the through-the-cycle (TTC) default probabilities used for Basel-driven regulatory capital calculations under the internal ratings based (IRB) approach.

Regardless of whether outputs are being used for IFRS 9 or Basel related purposes, they should:

  • Position the financial institution to meet regulatory requirements
  • Deliver reliable information, especially in an evolving stress situation

 

Executives and regulators alike need to understand their IFRS 9 methodology and model management. This demands data and credit-model transparency.

In The Best Of Times, It Is Challenging To Generate And Interpret IFRS 9 Results
The huge datasets involved coupled with the need to replicate data to execute multiple scenarios, model outputs, and ECL calculations means that IFRS 9 results can be difficult to interpret and defend. Banks using opaque models and calculation applications may not easily understand how outputs were generated. Thus, they may be in a difficult position to withstand audits. Organizations operating with fragmented architectures and lacking holistic IFRS 9 methodology and model management will find compliance challenging even during the best of times.

The Rats, And The Piper…
With the coronavirus scourge, the plot has thickened. Everything around IFRS 9 methodology and model management has become much more challenging. Like the plague of rats in Hamelin, economic crisis and continuing uncertainty have swarmed the world. Normal conditions have ceased. Shocking lock downs persist. Regulators and governmental bodies globally have responded with various crisis interventions including stimulus programs, special credit provisions, changes in regulatory reporting frequencies, and extensions of various Basel-related risk reporting deadlines.

Playing A Tactical Tune. Will That Drive Rats Away?
Caught in a black-swan vortex, banks have found themselves between the proverbial rock and a hard place. They have had to act with urgency to bolster economic activity – extending credit while being blinded by regulatory and PIT-driven ECL models flummoxed by volatile crisis impact. They have had to manage the urgent situation, while still needing to comply with IFRS 9 and Basel-driven requirements and attempting to drive down costs during a profit crunch.

For the time being, tactical moves are keeping at least some of the rats at bay. But this is a strategic juncture and firms need to make a change.

To successfully manage through the ongoing crisis situation, enter the post-pandemic period on solid footing, and keep the piper from returning and exacting brutal revenge, banks should take a three-pronged approach to IFRS 9 methodology and model management:

  1. Continue with tactical and strategic approaches for recalibrating models to account for the prevailing economic climate
  2. Implement an industrial strength IFRS 9 ECL calculation and reporting solution
  3. Adopt and embed a strategic framework to manage data and credit risk models that will serve long-term objectives for IFRS 9 and Basel-related regulatory requirements

 

The powerful and timely insights afforded by AxiomSL’s IFRS 9 and Basel-related solutions with IntegratedModelView enable financial institutions’ finance and risk functions to: deliver better information in an evolving stress situation, steer financials more adroitly, strongly position to meet regulatory requirements, and adapt agilely to a changing business landscape in the post-pandemic world.

Read the full whitepaper on IFRS 9 Methodology and Model Management Post Pandemic, or Contact us:

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