Abstract
The most important area of work for financial market regulators including International Accounting Standards Board is to clarify the metrics of credit assessment. This problem became particularly relevant after the financial crisis of 2008, when the insolvency of approaches to the assessment of credit risks adopted under the then international financial reporting standard IFRS (IAS) 39 became apparent, since credit losses on financial instruments were taken into account by the “loss model”, and therefore, the asset was recognized as financially impaired due to the fact of credit quality deterioration and significant time lag. From 1 January 2018 of a new international financial reporting standard IFRS9 IFRS 9 is based on a different approach — the principle of “expected credit losses” (ECL). The transition to IFRS 9 is intended to strengthen the banking system by increasing reserves , the banking system’s stability can be increased also. The new business model radically changes the approach to the formation of reserves, including by taking into account the impact of macroeconomic indicators on their value. According to various estimates, the scale of increase in reserves ranges from 30% to 50%. The purpose of this article is to systematize the methodological principles and approaches that underlie the requirements of IFRS 9 (basic and simplified and POCI approaches), as well as a comparison of the main methods for assessing the probability of default and expected credit losses (Weibul distribution, migration matrix, generator matrix ) In the framework of this article, the authors formulated criteria for the transfer of assets between the stages of credit risk (stage), and also formulated the principles for calculating expected credit risks for each stage, taking into account macroeconomic factors. This article is of practical value, as it can be the basis for the development of methods for calculating the expected credit risks of corporate clients of commercial banks, and can also be used to improve credit risk management models.
Highlights
In the previous standard (IFRS 39) the model of incurred losses should have been used [1]. It resulted in deferred recognition of credit losses because only the events that have occurred and current conditions influence the credit risk evaluation and the effect of possible future credit losses was not taken into consideration when calculations were made even if they were already expected at the moment [2]
IFRS 9 contemplates applying of expected credit losses value (ECL) uniform model by using three approaches: 1) general approach used for the majority of credits and debt securities; 2) simplified approach applied to accounts receivable; 3) the approach which will be applied to financial assets which have been credit impaired at initial recognition
Implementation of IFRS 9 requires change of traditional banking approaches and improvement of the existing methodologies and models of credit risk assessment including the cases of calculation of expected credit losses
Summary
In the previous standard (IFRS 39) the model of incurred losses should have been used [1]. Standard IFRS 9 is intended to solve this problem and is based on the model of expected credit losses [3] Another change in approaches to credit risk evaluation may be considered recording of forward-looking information on the basis of macroeconomic forecasts (change of inflation, currency rate etc.). Implementation of this standard is intended to improve the existing approaches to credit risks management. It resulted in deferred recognition of credit losses because only the events that have occurred and current conditions influence the credit risk evaluation and the effect of possible future credit losses was not taken into consideration when calculations were made even if they were already expected at the moment [2].
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