January 31, 2018 –
Issues, Questions and Preparation
Much ink has been spilt on the credit risk analytics and credit impairment methodologies concerning IFRS 9. Moving from a passive, annual credit review regime to an active monthly credit reporting has been a cultural sea change for most organizations. Having said that, the next logical progression is to industrialize the production process. From AxiomSL’s experience of implementing IFRS 9 systems, here is an educated perspective on the issues and the questions that could be asked from an audit perspective.
Multi-faceted Credit Artifacts
If we have just finished an exhausting IFRS 9 implementation, we now have a plethora of credit risk models, credit transition matrices, through the cycle and point in time estimates and credit impairment frameworks. The first step in industrializing the IFRS 9 process is to arrange all of the credit artifacts that have to be housed in a credit eco-system. These include notably model types, sector exposures, credit categories and impairment rules. This directly leads to a clear picture of financial assets and liabilities. Thus enabling an automated process that can be easily adapted to the bank’s business model is a foundational pillar to meet IFRS 9 compliance.
One approach is to run the entire methodology using massive excel macros and a few late nights at month end. Indeed, calculations across different asset types increases the volumes significantly since impairments are at a granular level. Another approach is to be able to house all of the relevant data, models and calculations in a single environment and be able to use a set of visual business rules to automate the end to end process.
This allows banks to fine tune their impairment results through a series of what-if simulations to see which rule set fits best in line with their business model as well as optimize ECL results. In other words, a single controlled environment where Finance can analyze the provisions calculation process, while Risk has the flexibility to build and execute Point-In-Time models creates a collaborative environment for the institution.
Managing P&L Volatility
First time IFRS 9 implementations have a direct impact on the P&L statement and Tier 1 Capital Ratios. As we have the ability to have all of the calculations in one eco-system, the next step is pre-processing.
Pre-Processing the entire balance sheet on a monthly basis gives both the Finance and Risk teams to be alerted on the emerging risks to the bank as a whole.
Pre-Processing creates an environment for the institution to iterate and fine tune the end to end process. This helps in managing P&L volatility, as the entire process has to be performed on a monthly basis.
Management and Audit Questions
Given that this is a new set of functions, the leadership or audit team at a Financial Institution may tread lightly. These constituents may want to know the following:
How did we classify all of the credit artefacts in the system?
What impairment methodologies were used in the calculation process?
Given our current process of IFRS 9 calculations, what is the anticipated impact on our P&Ls as credit conditions change on a month to month basis?
What checks are in place to catch discrepancies or reconciliation issues if any?
What quality assurance processes are in place to review anomalies prior to posting adjustments on the balance sheet?
Being able to implement data lineage or data – about the data goes a long way to answering these types of questions. Having a mechanism that immediately forms metadata of incoming information and being able to trace it through to an impairment charge and then to a balance sheet posting makes audits allows a Financial Institution to pass audit with flying colors.
About AxiomSL and IFRS 9
AxiomSL combines deep industry expertise with an intelligent platform and applications to deliver financial regulatory reporting, liquidity, capital & credit, operations, trade & transactions and tax analytics. Our global footprint spans 70 regulators across 50 jurisdictions, serving financial institutions with more than $39 Trillion in Total Assets. Our expertise in implementing IFRS 9 can be summarized as follows:
- Single platform to compute provisions across multiple subsidiaries, giving the organization the flexibility to deploy as needed
- Automating the end to end process from data capture, data aggregation, data quality checks, to ECL calculation, GL postings and Reporting in an eco-system designed to provide transparency and meet audit requirements.
- Built-in workflow capabilities to enable pre-processing, simulation of impact to arrive at a fine-tuned IFRS 9 implementation
- Capability to integrate your model library, as well as off the shelf underwriting and PIT models to complete any missing elements.
- Ongoing monitoring of across multiple regulatory interpretations, driving efficiency