With FRS 109/IFRS 9, the Expected Credit Loss (ECL) calculation for financial institutions and banks has been considered a complex and challenging calculation. It not only requires the use of extensive historical data for identifying historical experience but also statistical modelling to take into account current economic conditions and expectations of the future. The aim of ECL modelling is to create provisions based on expected future credit losses as compared to the incurred loss model.
This course is here to make such tricky calculations easy for you, especially in areas like segmentation, staging criteria, management overlay, macroeconomic overlays, scenario analysis, and data modelling.
We invite you for an intensive one-day complimentary workshop session on ECL with an aim to enable you to develop the requisite skills and gain insight on ECL calculation.
Learning Outcome
Attending the programme enables you to understand the:
- Background and need for an ECL model
- Requirements of IFRS on computation and disclosures related to ECL
- Underlying technical principles and how ECL is influenced by risk management or underwriting policies
- Technological challenges in ECL modelling such as automation, data requirements, system integration and how to deal with them
- Relevant inputs, assumptions and judgments in risk components of ECL such as macroeconomic forecasting, scenario weights, and overlays.
- Importance of managing data while building ECL models
- Policy choices that can trigger a significant impact on ECL
- Commonly-used approaches to account for ECL in business plans and budgets
- Practical aspects and know-how around implementation and review of ECL through case studies
- Basics of building flexible ECL models with interactive dashboards that allow impact analyses for different decisions
Program Deliverables
- One-day classroom session with lunch and refreshments
- Reference material and case studies
- Certificate of participation
- Q&A
Who Should Attend
- Senior and mid-tier executives in finance and risk teams of companies in the financial services sector
- Investors or deals professionals with an interest in the financial services industry
The programme will cover
Background, scope and coverage of ECL
- Meaning of ECL and background of why ECL was required
- Brief on classification of financial assets and applicability of ECL
Requirements of IFRS 9 and risk components of ECL
- Three stage model under IFRS 9
- Guidelines in IFRS to be followed while creating ECL models
- Approaches for calculation of ECL – discounted cash flow; use of PD, LGD and EAD
- Introduction to risk components of ECL
Segmentation
- Individual vs. collective assessment of financial assets
- Identification of shared credit risk characteristics for segmentation
Staging criteria
- Meaning of significant increase in credit risk (SICR) and rebuttable presumptions
- Concept of curing period
- Qualitative factors – early warning indicators, risk grading, modifications
Default definition
- Meaning of default (credit impairment) and rebuttable presumption
- Qualitative factors in default definition
- Regulatory considerations
Through the cycle probability of default (TTC PD)
- Meaning of TTC PD and related IFRS guidance
- Concept of ever default
- Introduction to commonly used approaches - Static pool transition rate approach, Transition matrix (Markov Chain model), Flow rates approach, Pluto Tasche model etc
- Regulatory considerations
Point in time probability of default (PIT PD)
- Meaning of PIT PD and related IFRS guidance
- Criteria for selection of macroeconomic variables
- Commonly used approaches - Logistic regression model, Vasicek model, Forward intensity model on distance to default etc.
- Introduction to scenario analysis and related IFRS guidance
- Approaches to scenario analysis – Building scenarios and assigning scenario weights, Monte Carlo simulation
Methods for calculation of LGD
- Meaning of LGD and related IFRS guidance
- Commonly used approaches - Workout method, Asset pricing models, Heuristic estimates, LGD using regulatory/market estimates
- Use of haircuts in LGD
- Treatment of credit enhancements
- Incorporation of forward looking information in LGD
Key considerations in EAD
- Meaning of EAD and related IFRS guidance
- Use of asset maturity pattern in EAD
- Prepayment modelling for behavioral maturity
- Computation of credit conversion factor (CCF) for facilities with undrawn exposures
- Behavioral maturity for revolving facilities
- Consideration of cash flows from balance sheet date to expected default date
Expected credit loss computation
- ECL formula
- Approach for determination of lifetime ECL
- Approach for discounting of ECL
- Considerations for management overlays
