Transformation of the Forecast Assessment of Expected Credit Losses in Monitoring and Assessment of Credit Risk in Commercial Banks

Yuliya V Morozova,Yuliya N Solnyshkova,Oksana A Kazankina,Elena G Azmanova,Elena V Travkina

doi:10.6000/1929-7092.2020.09.04

Abstract

The article presents the results of the systematization of issues arising in connection with the transformation of the banks forecast assessment of expected credit losses during the monitoring and evaluation of credit risk in commercial banks. Based on the data obtained on the introduction of IFRS 9 "Financial instruments" into the banking sector, it is concluded that in banking practice there is uncertainty regarding the long-term impact of credit risk, and there are significant difficulties with the use of a large amount of additional information, which creates certain difficulties in calculating future credit losses of banks. It is noted that the current use of the model of predictive assessment of expected credit losses of customers in the monitoring and evaluation of credit risk in the bank should take into account the selected collective or individual basis of assessment. The article presents a comprehensive approach to the use of the impairment model of expected losses in banking as a basic tool for modeling expected credit losses in order to form provisions for impairment with the allocation. The modification of this model will depend on the specifics of the bank's credit activities and portfolio, the types of its financial instruments, the sources of available information, as well as the IT systems used. Validation of this model will reduce the expected credit losses, reduce the amount of estimated reserves, as well as improve the efficiency of the Bank as a whole.

Highlights

The study of the factors that lead to the bankruptcy of banks in the assessment and monitoring of their financial stability focused on the negative change in the performance of banks' balance sheets (Demyanyk and Hasan, 2010; Mayes and Stremmel, 2014)
It should be noted that special attention in the use of impairment models of expected losses in banks is paid to the assessment of the risk of default (PD-Probability of default)
Since 1 January 2018 in the activities of banks that use in practice the standard IFRS 9 "Financial instruments" in the area of evaluation and calculation of the impairment expected credit losses, have been significant transformation processes

Summary

INTRODUCTION

The study of the factors that lead to the bankruptcy of banks in the assessment and monitoring of their financial stability focused on the negative change in the performance of banks' balance sheets (Demyanyk and Hasan, 2010; Mayes and Stremmel, 2014). One of the important features of the new standard IFRS 9 in assessing the expected credit losses of customers is to take into account the forecast macroeconomic information on its activities. Risk assessment by banks point in time based on the current level of losses, it is ineffective In this case, the possible future deterioration of the financial condition of the borrower in the implementation of negative risk factors is not taken into account. The very idea of forward-looking expected credit losses of customers in the monitoring and evaluation of the credit risk was embedded by the Financial Stability Board in 2014. This was a response to the global financial crisis in 2008. The content of the model will vary depending on whether the assessment is carried out on a collective or individual basis

Impairment Model of Expected Losses on a Collective Basis

Impairment Model of Expected Losses on an Individual Basis

RISK ASSESSMENT OF DEFAULT

CALCULATION OF LOSSES IN CASE OF DEFAULT

CONCLUSION