Abstract
Probabilities of default built for regulatory purposes cannot be applied directly to expected credit losses impairment calculations under the IFRS 9 new standard. This is because the regulatory framework requires stressed through-the-cycle (TTC) probabilities, so as to avoid a procyclical capital charge calculation, while IFRS 9 requires point-in-time (PIT) probabilities that include forward looking information. However the model (Asymptotic Single Risk Factor model or similar) that is generally used for the construction of stressed TTC probabilities of default can still be used to build forward looking PIT probabilities of default, provided it is made explanatory so as to obtain probabilities that are conditional on current and forecast economic conditions.This note explores how this can be achieved, thus leveraging on developments that institutions have already made in order to comply with regulatory requirements.
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