Entering a "new normal" for IFRS 9 ECL measurement

It is more than a year now since the outbreak of the pandemic, and significant challenges have been occurred in the way of living and working, public health and the economy.

As far as the economy is concerned, banks and credit risk management practitioners face a significant set of challenges to adapt IFRS 9 Expected Credit Loss (ECL) frameworks for the new normal.

Management teams need to adapt to the new reality, with enhancements to IFRS 9 ECL models and processes needed. With programs to repair and refine Internal Rating Based (IRB) credit risk models being finalised, the challenge will be to find the right mix of management adjustments, back-testing, recalibration and redevelopment with available resources.

Our publication explores how leading banks are seeking to address the challenges faced and meet regulatory expectations. In the short term, the credit risk outlook and impacts of the crisis (in terms of observed credit outcomes) remain highly uncertain, with increased use of top–down and bottom–up management overlays for ECL expected to continue.

The processes and controls used to capture and substantiate this expert judgment need to be strengthened, with a clear exit strategy to avoid long term reliance on management overlays. In the medium term, change programs are likely, to adapt and enhance data sourcing and infrastructure, plus methodological approaches and techniques, available for ECL model development, maintenance, implementation and use.