IFRS 9 Compliance

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The US Credit Reporting Regulations for retail credit Risk are known as FASB (also CECL), to come into effect in January 2020.

The European Regulations are IASB, and they will become effective earlier, in January 2018.

To avoid regulatory arbitrage, both IASB and FASB  have the same requirements and both reference IFRS 9.

With minor variations allowed for local interpretation, the requirements of IFRS 9 include the follows:

• Calculations of Provisions must be calculated on the lender’s own experience, (empirical) rather than being, as formerly, based on fixed rate assumptions of credit risk exposures
• Calculations must include credit risk in the Well Performing (up- to- date) Loans, embracing the Expected Loss Model, rather than being, as formerly, confined to recorded arrears (the Incurred Loss Model)
• The base statistics must reference the lender’s experience over an adequate time period, viz. between two and three years
• Loan assets must be differentiated and segmented to provide a real basis for differentiation of risk calculations, e.g. cars, versus home improvement loans.
• The Lender’s recovery experiences must be recorded and verifiable, as an important input to the risk calculation
• The base statistics must be recent. Historical statistics are important for comparatives and for trend analysis, but recent figures are the more relevant
• The data base must be large enough to be statistically reliable.
• Calculation must include reference to reliable credit scores, but should not depend overly on the scores which can only calculate for the borrowers
• Calculations should be variable over time and should be seen to respond to prevailing local and economic conditions