IFRS 9 and Expected Credit Losses
The IFRS9 Expected Credit Loss (ECL) standard was put in force in 2018 as a replacement for the Incurred Loss standard. IFRS9 accounting requires banks to hold provisions for credit losses that are expected to occur under scenario projections. The amount of provisions is dependent on a staged methodology with increase of provisions for loans whose credit quality has substantially deteriorated.
The ECL engine used for computation under the IFRS 9 framework is compounded of multiple core and satellite models e.g. Scenario generator based on economeric models, expansion, satellite models for non-core variables and credit drivers. We illustrate the approach with a fully fledged ECL engine on a mixture of three portfolios comprising HK sectors Mortgages, CRE, Manufacturing.
