Credit Losses Research Articles

Investigation and Modelling of Economic Systematic Risk and Capital Requirement: A Monte Carlo Simulation

This paper tests the ability of the regulatory capital requirement to cover credit losses at default, as carried out by the economic (optimal) capital requirement in Tunisian banks. The common factor in borrowers that leads to a credit default is systematic risk. However, the sensitivity to these factors differs between borrowers. To this end, we derived two kinds of sensitivity to systematic risk: the first is recognised by the Basel Committee; the second is derived from an economic approach. Hence, we can observe the impact of sensitivity to systematic risk on capital requirements. Empirically, we studied a sample of 100 individual borrowers from a Tunisian deposit bank that had credit in January 2020. We estimated the default probability for each borrower and then simulated their systematic risk sensitivity using the Monte Carlo approach, and compared them with the regulatory risk sensitivity. Then, we tested their effects on the economic and regulatory capital requirements. The results indicate that regulatory capital overestimates economic capital. This is due to the overestimation of borrowers’ contagion in terms of default risk, as shown by the superiority of their regulatory sensitivity systematic risk compared to the simulated risk. This leads banks to devote more capital than is really necessary to reach the regulatory standard. Hence, there was an increase in capital costs and the possibility of an arbitrage opportunity.

The impact of the application of the International Accounting Standard (IFARS 9) on the financial reporting of Iraqi private commercial banks

The problem of recognizing credit losses is one of the most important contemporary problems in accounting thought, as the process of creating a provision for credit losses is one of the most important bases of measurement in hedging against these losses and mitigating their impact. Studies and research in the field of accounting show that the accounting treatment used in accordance with the international standard (IFRS 39) is one of the fundamental reasons for the exacerbation of the global financial crisis in 2008, which is the delay in the recognition of credit losses until they are achieved, which is the so-called model of actual credit losses, as the treatment is based on recognizing the loss on the actual basis, i.e. after its occurrence, and not on the expected basis, i.e. before it occurs. In light of the criticisms leveled at the international standard (IAS 39) entitled Financial Instruments, the International Accounting Standards Board issued a standard for financial instruments, which is the International Financial Reporting Standard (IFRS 9). The new standard includes a proposed accounting framework for recognizing expected losses. According to the requirements of this standard, banks create provisions to face risks on an expected or estimated basis with the aim of early recognition of credit risks. As a result of the effects that this application will have on credit risks. It was necessary to shed light on the impact of the application of this standard on reducing credit risk, and thus the financial reporting of Iraqi commercial banks will be affected.

A Forward-Looking IFRS 9 Methodology, Focussing on the Incorporation of Macroeconomic and Macroprudential Information into Expected Credit Loss Calculation

The International Financial Reporting Standard (IFRS) 9 relates to the recognition of an entity’s financial asset/liability in its financial statement, and includes an expected credit loss (ECL) framework for recognising impairment. The quantification of ECL is often broken down into its three components, namely, the probability of default (PD), loss given default (LGD), and exposure at default (EAD). The IFRS 9 standard requires that the ECL model accommodates the influence of the current and the forecasted macroeconomic conditions on credit loss. This enables a determination of forward-looking estimates on impairments. This paper proposes a methodology based on principal component regression (PCR) to adjust IFRS 9 PD term structures for macroeconomic forecasts. We propose that a credit risk index (CRI) is derived from historic defaults to approximate the default behaviour of the portfolio. PCR is used to model the CRI with the macroeconomic variables as the set of explanatory variables. A novice all-subset variable selection is proposed, incorporating business decisions. We demonstrate the method’s advantages on a real-world banking data set, and compare it to several other techniques. The proposed methodology is on portfolio-level with the recommendation to derive a macroeconomic scalar for each different risk segment of the portfolio. The proposed scalar is intended to adjust loan-level PDs for forward-looking information.

Editor’s Note on ASU 2016-13 Pertaining to the Current Expected Credit Loss Standard

Editor’s Note on ASU 2016-13 Pertaining to the Current Expected Credit Loss Standard

Dampak Implementasi PSAK 71 Pada PT. Adira Dinamika Multi Finance, TBK.

The purpose of this study was to determine the calculation of the Allowance for Impairment Losses (CKPN), the impact and suitability of applying PSAK 71 at PT. Adira Dinamika Multi Finance, Tbk. This study uses a qualitative approach with descriptive research methods, by analyzing the application of PSAK 71 related to CKPN at PT. Adira Dinamika Multi Finance, Tbk. from 2019 to 2021. The results of this study indicate that, the calculation of Impaired Credit Loss (ECL) uses the Expected Credit Loss (ECL) Method in accordance with PSAK 71. The impact of implementing PSAK 71 increases the amount of Allowance for Impairment Loss on credit due to several accounts in the financial statements affected by the transition to PSAK 71 namely financing receivables, finance lease receivables and deferred tax assets, thereby affecting the company's capital by decreasing retained earnings. Covid-19 pandemic PT. Adira Dinamika Multi Finance Tbk. has implemented Credit Restructuring to reduce high CKPN balances in 2020 and 2021. In addition, there is no significant impact on changes in the classification of financial assets and PT. Adira Dinamika Multi Finance, Tbk. has implemented PSAK 71..

Research Opportunities to Confirm or Dispel the Myths of CECL: Looking Past the Headlines to Actual Results

CECL—an accounting response to lessons learned from the 2008 to 2009 financial crisis—like most accounting standards, is not perfect. Imperfections are a direct result of tradeoffs embedded in major new standards issued by the Financial Accounting Standards Board. Tradeoffs arise from cost—benefit judgments made over many years by individual Board members—often holding diverse views about costs and what constitutes decision-useful information. This article contributes to the assessment of those judgments and perceived weaknesses in CECL so that future Boards can continue the iterative process of improving U.S. GAAP. Some stakeholders assert that there are weaknesses because they believe CECL (a) will change how banks are managed; (b) may reduce the lending products provided; (c) necessitates a need for banks to raise capital; (d) would create widespread confusion among investors; and (e) could reduce the availability of credit. Now that CECL is effective for of the entire banking industry, the author believes the Financial Accounting Standards Board (FASB) and public policy-makers will benefit from rigorous academic research to help understand whether CECL met its main objective of providing more decision-useful information about expected credit losses. To achieve this objective, CECL strived to better align measurement of the allowance for credit losses (a valuation account) with changes in credit risk and to require consideration of a broader range of information. This article explores the relevant accounting issues and early financial reporting results to pique the interest of academic researchers.

The accounting treatment of expected credit losses by South African banks during COVID-19

Orientation: The coronavirus disease 2019 (COVID-19) pandemic negatively affected borrowers’ ability to repay debt, which is expected to influence banks’ calculation of their expected credit loss (ECL) allowance. Comprehensive disclosure regarding the application of managerial judgement in calculating ECLs would produce decision-useful financial information.Research purpose: This study explored the effects of the COVID-19 pandemic on the measurement and disclosure of ECL allowances by South African listed banks.Motivation for the study: It is unknown whether decision-useful financial information regarding South African banks’ ECLs was produced during the pandemic, mirroring developed countries.Research approach/design and method: Content analysis of quantitative and qualitative data from annual financial statements was employed for a sample of listed banks.Main findings: Banks employed a variety of relief measures to accommodate borrowers, but these relief measures did not automatically trigger a significant increase in credit risk. More loans were subject to lifetime ECLs, causing the ECL allowance to increase substantially during the first year of the pandemic. Forward-looking information as well as postmodel adjustments were employed to measure the ECL allowance.Practical/managerial implications: The ECL allowances of South African listed banks increased during the pandemic. Disclosure in the annual financial statements and identifying ECLs as a key audit matter provided evidence of adequate consideration of the credit risk and forward-looking information influencing ECLs by banks and their auditors. Improved disclosure regarding postmodel adjustments is required.Contribution/value-add: During the COVID-19 pandemic, decision-useful financial information regarding the calculation of banks’ ECL allowances was available for South African banks, mirroring developed countries.

Understanding the current global regime shift and the standing of the macro-financial system resilience

Understanding the current global regime shift and the standing of the macro-financial system resilience

Evaluation of Credit Sales and Non-Performing Loans (NPL) of PT. Bank Sulutgo Ranotana Sub-branch Office

Credit is a business activity in the form of providing cash or non-cash loans to other people based on the procedures applied. PT. BSG is a BUMN engaged in community service such as providing loans to customers. In the case that occurred at PT. BSG Limboto Branch in 2015 and 2016 the loans provided turned out to be indications against the law and deviations from statutory SOPs governing the application and granting of credit. After investigation, the collateral for the credit agreement did not meet the requirements, causing credit losses which could affect cash flow at PT. BSG. Poor credit sales management can lead to losses, therefore the company is required to place more emphasis on its management system so as to minimize credit losses experienced by the company. The purpose of this study is to evaluate the management of credit sales and credit losses implemented by PT. BSG KCP Ranotana based on the method and type of qualitative descriptive research. The results showed that the management of credit sales by PT. BSG KCP Ranotana has been implemented very well but there are still indications of a decrease in collectability which may result in credit losses so that banks must manage credit losses by establishing CKPN.

Tingkat Kecukupan Cadangan Kerugian Kredit Ekspektasian di Era Pandemi Pada Bank Pembangunan Daerah Bali

The research aims to analyze the formation of Expected Credit Loss Reserves (CKKE) at the Bali Regional Development Bank (BPD) during the COVID-19 pandemic in accordance with POJK 17 of 2021 concerning the Second Amendment to Financial Services Authority Regulation Number 11/Pojk.03/2020 concerning National Economic Stimulus As a Countercyclical Policy on the Impact of the Spread of Coronavirus Disease 2019. The research uses a qualitative method approach with research subjects in all credit sectors owned by Bank BPD Bali. The methods used in collecting data in research are interviews and documentation studies. The data analysis technique used by the research uses triangulation, namely data reduction, data presentation, and drawing conclusions. The results of the study show that the level of adequacy of the establishment of BPD Bali's Expectation Credit Loss Reserves (CKKE) is in sufficient condition to be able to cover credit restructuring due to the impact of the COVID-19 pandemic, which can be seen from the average coverage ratio which has been 100%.
 Keywords: Banking, Credit Expectations, Economic Impactsiko debitur.

Impairment Model of Financial Instruments

Through an applied exercise, this research article sought to document the impairment model of financial instruments proposed by the International Financial Reporting Standard (IFRS 9). For this purpose, an investigation was used based on the documentary data source, with a qualitative approach and descriptive-explanatory scope. Among the main findings, it is found that the application of the new impairment requirements of IFRS 9 presupposes an increase in the provisions for credit losses of the organizations, in which the need to use methodologies to estimate the probability is evident of non-compliance as a safeguard measure for organizations.

The Intricacies of Climate-Related Risks on European Banks’ Estimation of Expected Credit Losses: Linking Proper Accounting of Climate Risks to Shareholder Required Returns

Global banks face a predicament amidst the dictates of IFRS9 accounting policies. Commencing in 2018, incurred losses plus expected losses are to be reported. Loss allowances on loans and advances should be set aside earlier and should therefore be higher than they would be pursuant to the impairment provisions of IAS39. This paper focused on a sample of the top 40 European banks by assets and assessed the transition from IAS39 to IFRS9 through panel data distinguishing credit risk allowances over distinct IAS39 and IFRS9 periods. Economic climate damage data was obtained from the European environmental agency website, and incurred losses as well as expected credit losses data was fetched from annual financial reports. A null hypothesis indicating that banks had lesser or equal IAS39 incurred losses than IFRS9 expected credit losses was tested and rejected. The relationship between economic damages and estimates of credit losses was investigated using a two-sample t-test and Pearson productmoment correlation. Results revealed that banks have been conservative in estimating credit losses since adopting IFRS9. Consequently, the paper contributes in revealing to banks the need to proactively account for climate damages in the wake of IFRS9. It prompts shareholders to incorporate economic climate-induced damages in risk/return decisions.

КРЕДИТНИЙ РИЗИК У СУЧАСНИХ УМОВАХ

The article carried out scientific research and investigated the problem of the correct interpretation of the concept of "credit risk". The norms of the current legislation of Ukraine regarding the definition of the concept of "credit risk (CR)", which is regulated as the amount of expected losses or damages (EL) for an asset as a result of the debtor’s (counterparty’s) default, have been analyzed. The concepts of "default" and "credit loss" are considered, the National Bank of Ukraine’s assessment of the credit portfolio due to the war is disclosed, the losses of which are estimated at the level of 30%, which poses a great threat to the banking sector. Changes to a number of regulatory documents regarding prudential credit risk assessment approaches have been analyzed: banks’ opportunities to apply simplified credit risk assessment procedures have been expanded; established temporary features of credit risk assessment to support banks in providing flexible conditions, socalled credit holidays, to borrowers in a period of uncertainty; an amendment was made to the Instruction on the Procedure for Regulating the Activities of Banks in Ukraine, which reduced the risk weight (RWA) from 150% to 100% for consumer unsecured loans. The restrictions on foreign currency exchange operations related to non-resident banks on the so-called "stop" conditions for the first group of the Foreign Currency Classifier to support the liquidity of banks have been substantiated. Innovations of the International Financial Reporting Standard IFRS (IFRS) were studied, which in the legal and economic context of the essence of credit risks provides for the concept of expected credit losses (which will always be greater than zero), which should reflect probable losses due to the ownership of financial assets. The means of reducing credit risks were analyzed, in particular, diversification: geographical and portfolio. Considering the specifics of credit risks, the specifics of credit transactions are substantiated. The criteria for assessing credit risks based on qualitative and quantitative analysis are revealed. It was concluded that the actual assessment of credit risks in financial terms is under the influence of credit risk on the financial results of business entities and banking institutions and the specifics of credit operations.

A coherent economic framework to model correlations between PD, LGD and EaD, and its applications in EaD modelling and IFRS-9

This paper proposes an economic framework recognising EaD as a stochastic variable and capturing the PD–LGD, PD–EaD and LGD–EaD correlations. It explains how these correlations can be estimated from historical data, and how PD, LGD and EaD can then be simulated in determining credit VaR. The framework allows credit losses to be more accurately captured, both in terms of the expected credit losses (ECL under IFRS-9 and CECL) and the unexpected tail events in measuring Credit VaR. The framework quantifies the potential underestimation of the tail risk in Credit VaR and the IFRS-9 ECL if the full correlation structure is not captured. By explicitly modelling EaD in a correlated fashion with PD and LGD, lenders can understand and model the increase in funding requirements during downturns. Application in back-testing IFRS-9 ECL is discussed and supplemented by a numerical example.

The cyclicality of bank credit losses and capital ratios under expected loss model

The cyclicality of bank credit losses and capital ratios under expected loss model

Limitations of Implementing an Expected Credit Loss Model

Limitations of Implementing an Expected Credit Loss Model

Current Expected Credit Losses and Consumer Loans

Current Expected Credit Losses and Consumer Loans

МЕТОДОЛОГІЧНІ АСПЕКТИ ОБЛІКУ ДЕБІТОРСЬКОЇ ТА КРЕДИТОРСЬКОЇ ЗАБОРГОВАНОСТЕЙ В СИСТЕМІ РОЗРАХУНКІВ: ВІТЧИЗНЯНА ТА МІЖНАРОДНА ПРАКТИКА

The purpose of the study is to reveal certain methodological aspects of accounting for receivables and payables in order to improve the accounting information base in today's complex conditions. To achieve the goal, the tools of scientific research are applied, namely: analysis and synthesis, induction and deduction (when posing a problem); comparison, systematization and theoretical generalization (during the comparative analysis of moments of recognition, termination of recognition, evaluation and reflection in financial statements of receivables and payables, as well as when determining the reserve of doubtful debts of receivables); graphic method for rational, compact, visual presentation of research material; the cause-and-effect method and the abstract-logical method were used in the development of directions for further research. The article examines the main methodological aspects of accounting for receivables and payables in the settlement system by comparing the recommendations of national and international standards. Improving the accounting of receivables and payables will allow to improve the settlement management system and ultimately the financial condition of the enterprise. A list of national and international standards that determine the methodological principles of accounting for receivables and payables is given. The main methodological aspects of displaying information about receivables and payables in national and international accounting practice were analyzed by comparing the recommendations of the standards. This is the recognition, termination of recognition, evaluation and reflection in the financial statements of receivables and payables, as well as the issue of determining the reserve of doubtful debts receivables. It is substantiated that the methodological aspects of national accounting of receivables and payables mainly correspond to international ones.. Differences have been established in terms of the definition and methods of assessment, creation of a reserve for doubtful debts ("expected credit losses") and requirements for disclosure of information in accounting reports. Prospects for further research are outlined, in particular, a thorough study of these differences through the prism of the possibility of implementing the requirements of international standards into national practice to improve the accounting information base in today's complex conditions.

Forecasting for regulatory credit loss derived from the COVID-19 pandemic: A machine learning approach

The economic onslaught of the COVID-19 pandemic has compromised the risk management of financial institutions. The consequences related to such an unprecedented situation are difficult to foresee with certainty using traditional methods. The regulatory credit loss attached to defaulted mortgages, so-called expected loss best estimate (ELBE), is forecasted using a machine learning technique. The projection of two ELBEs for 2022 and their comparison are presented. One accounts for the outbreak's impact, and the other presumes the nonexistence of the pandemic. Then, it is concluded that the referred crisis surely adversely affects said high-risk portfolios. The proposed method has excellent performance and may serve to estimate future expected and unexpected losses amidst any event of extraordinary magnitude.

Current Expected Credit Loss Standard and Bank Lending Procyclicality: Evidence from the US Housing Market

Current Expected Credit Loss Standard and Bank Lending Procyclicality: Evidence from the US Housing Market