With the publishing of IFRS 9 by the The International Accounting Standards Board (IASB), the IAS 39 and all models connected to it are being phased out. What this means for banks is that a new accounting standard will be in place that companies, financial or otherwise, have to adhere to by Jan 1, 2018.
IFRS 9 Impairment Methodology
“The IFRS 9 standard requires banks to switch to providing for expected credit losses on loans immediately.”
Most relevant to banks is the fact the IFRS 9 standard has a new impairment model, requiring banks to switch to recognizing and providing for expected credit losses (ECL) on loans immediately — rather than the current practice under of providing only when losses are actually incurred. U.S. Banks will apply a variant of IFRS 9 as defined by the Financial Accounting Standards Board. The FASB’s current Expected Credit Loss Model is still reported in draft stage, but will be similar to IRFS 9.
Under the new standard, a bank must create a methodology to calculate ECL according to loan segment and stage classification, i.e. performing, underperforming or non-performing. This may be produced by an analytical team in the Credit Risk department. A more operational risk team is allowed to add tactical classifications to specific loans/industries, which will inform the stage classification. For example: A loan that is Stage 1 according to the methodology could be, in reality, at Stage 2 today because the client is a fracking company and that industry is considered risky in the current market.
IFRS 9 Data Model
So how can a bank truly measure risk under the new standards and — most importantly — know if they need to scale up loan loss provisions? GDS Link’s software offers a tailored solution which:
- Allows for multiple types of users on different teams to independently and simultaneously enter models and calculation formulas (methodology) and rules (tactical exceptions).
- Can be run daily for simulation purposes, then monthly for actual accounting.
- Shows the logic of the calculation in a way that is visually understandable by non-technical users.
- Is highly scalable to portfolios of millions of customers.
To find out how GDS Link can help your enterprise adjust to new regulatory changes, get in touch today.