CRIF IFRS9 Solution- Not just for your CFO
- 1. IFRS9, it is not just for your CFO Luca Calconi CRIF Principal Consultant 01-February-2018
- 3. 3 1. Reference Context • 01.01.2018 Kicked-off, and now? • Methodological Challenges • Expected reaction form the lenders
- 4. 9 is about to off globally Lot of focus from investors, key stakeholders and regulators on interim financial statement before banks issue their first annual financial statements applying IFRS9 • Issuing of a separate transition document to help users better understand the IFRS 9 impacts at, and beyond, adoption • Given the lack of prescriptive requirements, judgement will be required by banks in designing disclosures for reporting (different extent of disclosure depending on bank size and nature of the business) • Early involvement of auditors to obtaining views that will avoid potential issues later in the annual reporting cycle.
- 5. The New normal provision for undrawn amounts transfer criteria from Stage 1 to Stage 2 develop a forward- looking assessment • Monetary impact can be very heterogeneous depending on portfolio risk and type of product • High impact on revolving product • Lower impact on instalment loans and mortgages (but strongly dependent on product maturity) • Greater ongoing volatility vs. IAS 39, especially as forecast macroeconomic conditions vary From IAS39 to IFRS9
- 6. 6 modelling challenges • Data infrastructure in place • Analytical skills spread across the teams or in the RM division • The challenge is taking profit from risk parameters that banks already estimate and use (typically, for credit risk management purposes), aiming for maximum consistency and minimum duplication of effort For the lenders who developed IRB framework … • Retrieve of historical information and build of Analytical Datamart • Lack of predictive analytics skills • Balancing of costs and benefits must therefore be carefully assessed. Start simple and planning a roadmap for the evolution of the methodology and IT infrastructure over the next 2-3 years … For the others
- 7. operational challenges 1 2 3 4 1. Reliability IFRS 9 calculation engine must be able to process many calculations against large numbers of accounts efficiently and reliably. 2. Governance Strong governance and control elements to manage changes to data, models and process flow. Changes should be clearly auditable and updates to production models should be tightly controlled by managing user permissions 3. Reporting Robust reporting capabilities to enable mandatory disclosures, internal management information, and ad hoc analysis 4. Flexibility Quick implementation of new generation of models and the possible inclusion of new data into the process
- 8. Review your analytics toolkit: …a few hints TransferCriteria • Statistically derive all migration factors (endogenous and exogenous) • Differentiate of trigger event by risk segment, counterparty and product • Perform some correlation analysis of each trigger possible variable with the effective increase in the credit risk • Determine of a threshold based on a historical analysis of the triggers and the risk profile • Involve business people for an integrated assessment that is not the expression of only quantitative elements
- 9. Review your analytics toolkit: …a few hints ExpectedLoss • Measure goodness of fit for alternative techniques to project lifetime default estimations • Different methodologies can be adopted for different products • Combine Markov Chain (which over-estimates after year 3) and Vintage analysis (which overestimates in the first 3 years) • Test alternative macroeconomic Indicators and adopt a conservative approach in terms of variables • Control for impairment system volatility to avoid impacts on the value adjustment - and ultimately on income statement
- 10. What does this mean for Banks? Banks will report a significant increase of provisioning figures (in a range of 30% - 60%, depending on products maturity and forward looking scenarios) Phase1 Banks will seek for alternative solution to limit impairment increase and ensure full compliance. Full review of risk parameters, staging criteria and forward looking approach Phase2 Parallel run of alternative solutions and comparison of impact on provisioning. Benchmarking and getting ready for validation process Phase3 2018 Q1 2018 Q2 2018 Q3
- 11. 1 Where do the savings on impairment increase come from? Lifetime projection of Risk parameters Methodology choice to estimate lifetime PD 2 Staging Optimization Reduce to the minimum the ‘scale’ effect due to the migration between Stage 1 and Stage 2 3 Reliable Forward Looking modelling Accuracy and stability of economic forecasts is a key factor to mitigate impairment spikes
- 12. 12 2. Managerial Impacts • Actors involved • Internal affected processes
- 13. 13 Budget Planning Credit Process RM&Capital Allocation 3-5 Years 1 Year 1 Day 1 Month Industrial Plan Credit Strategy Capital Planning Budget Goals Policy Rules Capital Adequacy & Risk Policies Risk Based Pricing Risk Monitor Lending Process Early Warning & Collection Targeting Budget Monitor IFRS9 impact on planning and credit strategies to define cost of risk and actions
- 14. 14 • Produce the risk parameters for the new impairment model • Guarantee the suitability for accounting purposes and the consistency with other risk measurement, validation and capital planning tools that already exist within the company CRO • Will be required to review the areas where the concept of lifetime loss can be expected to have material effects (such as the bank’s credit policies, origination processes, loan monitoring procedures). CLO • Check that the tools developed for the implementation of the new impairment model are in line with the bank’s Risk Appetite Framework and the scenarios already used for strategic planning • Update the ICAAP process, and the bank’s estimates of its overall internal capital (both present and future) BoD
- 15. 15 • Identify the bank’s target portfolios, taking into consideration also the risk of transition, over multiple years, from Stage 1 to Stage 2 • Different segments (in terms of products, clients and maturities) will have to be simulated over multi-year horizons in order to gain a deeper understanding of their potential, in terms of future vulnerability to impairment risk • Review their product catalog, especially for long- term loans, which will be particularly penalized, in terms of potential impairments, by the transition to the lifetime approach embedded in IFRS9 Impact on Credit/Commercial Strategies
- 16. 16 • Review pricing strategy to make it consistent with the new cost of risk paradigm • Loan application process and the approval of new loans will have to take into account the new lifetime PDs. to benefit from multi-year risk estimates to achieve a better assessment of creditworthiness in the origination phase. Impact on Lending Strategies
- 17. 17 • Banks will have to identify those Early Warning indicators that, while being consistent with the pre-existing risk management criteria (reduce Default), may lead to a transition across IFRS9 stages (reduce migration to Stage 2) • Introduce leading indicators for the staging criteria • Verify how present EW system predict Stage 1- Stage 2 migration • Change le logic of priorities settings • Introducing dedicated teams/treatments to manage high transition risk cases Impact on Credit Monitoring Strategies (1/2)
- 18. 18 Impact on Credit Monitoring Strategies (2/2) 65% 15% 20% Information blocks contribution Internal Triggers Internal Scoring / Rating External (Bureau) Scoring / Data 45% 15% 40% Internal Triggers Internal Scoring / Rating External (Bureau) Scoring / Data Today Tomorrow
- 19. 2018 will be crucial to measure impacts of the new principle and tune models 1 Methodology is not neutral on the final bottom line impact 2 Several internal processes will be affected by the new impairment calculation 3
- 20. Account level behavioural data External Data • Delinquency status • Balance • Credit limit • Loan term • Score • Exposure • LGD (if not available a benchmark value will be provided); • EW flags; • Macro economic values Bank ‘i’ data Macroeconomic KPIs under alterative scenarios External Data • Adverse • Neutral • Positive Designer • Designer of staging criteria; • Macro economic scenario setting & Simulation • Lifetime risk parameters; • 1y risk parameters; • Forward Looking Parameters • Staging Criteria • Expected Loss Risk KPIs developed on Bureau data: CRIF IFRS9 engine IFRS9 analytical data mart Monthly batch updated CRIF IFRS 9 ENGINE IS CURRENTLY WORKING (in Italy) ON 160 BANKS AND FINANCIAL ISTITUTIONS • Reporting • Expected Loss per line; • Risk parameters and stage per line Containment of operational risk No effort to provide IFRS9 EL required to the client No investment on engine purchase Sharing of maintenance costs CRIF answer: IFRS9 engine
- 21. CRIF answer: IFRS9 engine / embedded reporting Main output variables IFRS9 Contract ECL by segment Bucketing/ Staging criteria 1 Risk parameters (PD,LGD EAD) Exposure Type of contract Expected Credit Loss Ageing Examples PD next 12 m by segment Cost of credit Expected by IFRS 9 3 2 3 Client Segment Credit risk status Benchmarking4 Breakdown 1 1 2 Composition of Stages PD, LGD, EAD by stage 3 ECL By stages 2
- 22. Meet The Team To know more, please contact our domain experts Marco Luca AtriLuca Principal Consultant Based in Dubai (UAE) l.calconi@crif.com Marco Head of Regulatory Risk Based in Bologna (Italy) m.macellari@crif.com Atri Analytics Director Based in Pune (India) a.basu@crif.com
- 23. IFRS9, it is not just for your CFO Luca Calconi CRIF Principal Consultant 01-February-2018