Benchmarking credit risks key to understanding and addressing variability, highlights Global Credit Data’s IFRS 9 Report

Global Credit data has just released a new report – the IFRS 9 Report – which demonstrates that banks’ expected credit loss estimates may vary by at least factor 4. Results from the study suggest that the IFRS 9 framework is yet to stabilise, given a significant degree of variability. While some variability is to be expected, this level of variability may encourage regulators and auditors to push for greater consistency – an outcome that could lead to restrictive or unsuitable interpretations for some banks.

Global Credit Data’s second IFRS 9 benchmarking report confirms banks’ expected credit loss estimates vary by at least factor 4 

Global Credit Data, a not-for-profit data-collection initiative jointly owned by more than 50 leading global banks, has today released its second IFRS 9 benchmarking report, with the results highlighting a need for a greater number of banks to participate in the benchmarking process. 

IFRS 9 requires banks to estimate a one-year and a life-time expected credit loss (ECL). These measurements are expected to be responsive to macroeconomic developments and to include a forward-looking perspective. A level of variability is, therefore, to be expected, as ECL should also capture banks’ specificities. 

However, results from the study – conducted in the summer of 2018 and supporting 26 international banks in finalising their IFRS 9 implementation – demonstrated a significant degree of variability of around factor 4. This suggests that the IFRS 9 framework has yet to stabilise. 

“We remain in the early stages, however, the high level of variability in ECL figures under IFRS 9 is something the industry will need to analyse and address,” says Richard Crecel, Executive Director of Global Credit Data. “If banks don’t act, they may find the regulator acts for them – and imposes more restrictive standards than many would like.” 

The question remains: How much variability is too much? And how should the industry go about standardising the approach to IFRS 9? 

“We are not looking for a one-size-fits-all calibration,” says Daniela Thakkar, Methodology & Membership Executive, Global Credit Data. “Banks and regulators need to understand the potential effects of IFRS 9, and benchmarking will be a key tool in this regard. We hope this report will generate an industry-wide conversation and encourage financial institutions to participate in such benchmarking activities.” 

As institutions develop more precise methods to improve future credit loss estimates, regulators and auditors will push for greater consistency. Global Credit Data, as part of its mission to help financial institutions better understand and model their credit risks, is leading the way in engaging and supporting banks towards this objective.

About Global Credit Data:

Global Credit Data (GCD) is a non-profit association owned by its 55-member banks from around the world. Its simple mission is to help banks better understand and model their credit risks through data pooling and benchmarking activities. 

GCD’s LGD & EAD Platform is the world’s largest database for LGD and EAD modelling totalling over EUR 200 billion in all Basel Asset Classes. In 2009, GCD introduced a PD & Ratings Platform which now covers more than 15 years of data and helps banks to calibrate and benchmark their PD models in use for regulatory & economic capital, stress-testing, impairment calculation and pricing. 

In 2011, GCD started a third database: The Benchmarking Platform. The database includes borrower name and cluster level estimates to help banks to instantly compare PD, rating, LGD and EAD model estimates with their peers. The robustness and capacity of GCD’s data collection and management infrastructure places GCD databases as the global standard for credit risk data pooling.