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But with regard to ...
- Staging,
IFRS9 IFRS 9 differentiates between 3 stages depending on the significance of the deterioration in credit quality. Depending on the stage assigned, IFRS9 IFRS 9 calls for the consideration of 12-month or lifetime ECLs.
As far as early warning is concerned, the differentiation between the 3 stages does not have a sufficient degree of fine granularity. For example, it makes a difference in the probability of default from the perspective of the individual deal if a retail customer is delayed with a due payment for 5 days, 2 weeks or even 4 weeks. Even the probability of success of forbearance or modification measures depends on the right timing which is not necessarily provided by regulatory approaches. - Segmentation,
Conventional approaches work with a rule-based segmentation, applying manually captured settings to identify similar credit risk characteristics using an excerpt of the customer DNA and some product and deal-specific parameters. The calculation of lifetime expected credit losses using parameters based on portfolio/segment, defined using high level similar credit risk characteristics, is fine. However, e.g. for significant deals, the use of regulatory segments to decide on a credit risk adjusted price is questionable. Due to the rough granularity of segments, an entity might not make a deal because the interest offered was too high or it might conclude a deal where the interest does not cover the credit risk.
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Conventional approaches are sufficient and accepted for regulatory requirements. Of course, they can be generally used for business analysis too. |
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