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Content,
Challenges and
Tools
Murat Alsan
Partner
Head of Audit
Head of Financial Services
Tel: +49 69 9587-2787 Tel +49 211 475-7212 Tel +49 69 9587-3420
Mobile: +49 172 6801769 Mobile +49 172 4514529 Mobile +49 173 6872067
joerghashagen@kpmg.com cradermacher@kpmg.com jringschmidt@kpmg.com
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Agenda
WRAP UP
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A Brief Overview of IFRS 9
IFRS 9 issued July 27th 2014
Version Content
Carried over from FASB is, in parallel to IASB, reworking their
IAS 39 regime for the accounting of financial
IFRS 9 New accounting rules for the Rules for instruments.
(2009) Classification and recognition and
Measurement of financial derecognition of Attempts to converge accounting models in
assets and financial liabilities financial the area of impairment have finally been
IFRS 9 instruments; only abandoned
(2010) minor Users will have to comply with two
amendments.
conceptually different accounting models
IFRS 9 New rules for the use of
(2013) Hedge Accounting
Effective Date
IFRS 9 Amendments to the Entity shall apply IFRS 9 for annual periods
(Complete 2009/2010 draft regarding beginning on or after January 1, 2018.
Standard) Classification and
Measurement Early application permitted but generally
Introduction of new Expected requires application of all entire standard at
Loss Model for recognition the same time (exception: FVtPL)
and measurement of loan
No requirement regarding comparatives;
loss allowances
Provision: requires availability of reliable data
The new IFRS 9 standard also amends IFRS 7 „Financial
EU endorsement of IFRS 9 outstanding –
Instruments: Disclosures“ due to newly imposed disclosure
situation in Europe is also not finalized
requirements (esp. for Impairment)
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A Brief Overview of IFRS 9
Phase 1: Classification and Measurement
Equity Debt
Significant level of judgment in the determination of
Derivatives
Instruments Instruments the business model classification of
Classification at amortized cost is an explicit goal of
the majority of banks
Business Model Business Model Business Model Amendments of IT-Systems and processes required
Non Holding Holding Mixed
to provide additional information product features as
no Cash Flow Cash Flow
basis for Classification and Measurement
Held for Trading
yes Criterion Criterion Efficient Classification through operationalization of
Benchmark Test processes and IT support (tools)
ye yes
s
no Fair Value Fair Value
Option Option
Business Impacts
ye no no
no s
OCI Option OCI Option
Documentation requirements in the classification
yes yes process
Fair Value Fair Value Fair Value Amortized Fair Value Systemic review of current features on loan
through through Option Cost through agreements as well as their impact oriented
Other Profit and Other
Comprehens Loss Comprehens evaluation for the future business
ive Income ive Income Review potential impact on pricing
Higher P&L volatility as well as higher volatility in B/S
FVOCI FV FVO AC FVOCI and Regulatory Capital levels as a result of broader
Fair Value accounting.
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A Brief Overview of IFRS 9
Phase 2: Impairment
Disclosures
Business Impacts
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BDDK ve UFRS Karşılık Uygulamaları
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BDDK ve UFRS Karşılık Uygulamaları
Önceki yıllarda gider yazılan fakat cari Önceki yıllarda gider yazılan fakat cari
dönemde iptal edilen özel karşılıklar dönemde iptal edilen özel karşılıklar
nedeniyle elde edilen gelirler, cari yıla ait
2 nedeniyle elde edilen gelirler, önceki yıllara
ait gelirler hesabında
2 karşılık giderleri hesabında net gösterilmek
muhasebeleştirilmektedir. suretiyle muhasebeleştirilmektedirler.
Donuk alacak olarak kabul edilen kredi ve Donuk alacaklardan elde edilen faiz
diğer alacaklar değerlemeye tabi tutulmaz ve gelirlerine, gelecekteki nakit akışlarının ilgili
değer düşüklüğü zararının ölçülmesi
4 bunlar için faiz tahakkuku ve reeskontu
yapılmaz. Önceden yapılmış bulunanlar ise
4 amacıyla iskonto edilmelerinde kullanılan faiz
iptal edilir. oranı kullanılmak suretiyle
muhasebeleştirilmesine izin verilmektedir.
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BDDK ve UFRS Karşılık Uygulamaları
UMS
39 UMS 39’da açık ve net olarak ifade edilmeyen gayrinakdi krediler için ayrılacak olan
karşılıklarda nakdi krediler bölümünde ifade edildiği gibi tarafsız göstergelerin varlığı halinde,
Bankaların şirketlerden olan nakdi ve gayrinakdi riskleri değer düşüklüğü için beraber
değerlendirilmelidir.
UMS 37 hükümleri gereği karşılık olarak finansal tablolara yansıtılacak tutara ilişkin
belirsizlikler koşullara bağlı olarak farklı açılardan ele alınmaktadır.
Değerleme konusu karşılığın çok sayıda kalemden oluştuğu durumda, ilgili yükümlülük her
türlü getiriyi bunlara ilişkin olasılıklara göre ağırlıklandırmak suretiyle tahmin edilir. Bankalar
bilanço dışı yükümlülükleri için karşılık ayırırken geçmiş tecrübelerine dayanarak “beklenen
değer” metodunu kullanabilmektedirler.
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BDDK ve UFRS Karşılık Uygulamaları
BDDK
Bankalar BDDK tarafından belirlenmiş oranlarda
standard ve yakın izlemedeki krediler için genel
karşılık hesaplamaktadır.
UMS UFRS’de ise kredi ve alacaklar için Yönetmelikte belirtilen yönergeler ile
hesaplanan bir genel karşılık bulunmamaktadır.
39 UFRS’ye göre Banka, öncelikle, değer düşüklüğüne ilişkin tarafsız
göstergenin bireysel olarak önemli olan kredi ve alacakları için bireysel bir
şekilde, bireysel olarak önemli olmayan kredi ve alacaklar için ise
bireysel veya toplu bir şekilde bulunup bulunmadığını değerlendirir.
İki yöntem sıklıkla kullanılmaktadır. Bu yöntemlerden ilki tarihsel istatistik
(Historic loss rate), ikincisi ise yaşlandırma (aging) metodudur.
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A Brief Overview of IFRS 9
The challenges involve extensive technical requirements…
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A Brief Overview of IFRS 9
…and implications for technical implementation
IFRS 9-Implications for the IT-Implementation Operative External data Client data
Division I Division II Division n
source (Insourcing)
Systems
Implementation of new holding
categories in all level Transfer,
Decision about automatic or manual Integration Conversion
Norm
Quality
Mgmt.
Data
Enrichment
Creation
Cash Flows
Splitting
Security
allocation
ledger
P&L
Accounting Risk Controlling
statement
Examination whether current
Phase 2: Internal
Portfolio-Model
models
RORAC, etc
Market price
Methods
Credit Risk
.
US GAAP
(Devel.,
RAROC,
Impairment
Liquidity
OP Risk
IFRS
HGB
Risk
Risk
Validation,
The planning approach is subject to the depth of the business and IT specifications
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Implementation considerations
Key challenges
Strategy IT
?
Finance
FO
Risk
Finance
Risk
■ The current range of maturity ■ Most firms struggle with data ■ There are a range of
within the industry is varied. and ensuring that they can processes which will come
However, the main key success identify the correct data from within the audit scope –
criteria for more advanced firms the correct source system and granular credit rating systems,
seems to be an ability to being able to replicate the regulatory capital and
collaborate cross functionally information horizontally across economic forecasting may be
across traditional silos. different businesses. particularly challenging.
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IFRS 9 poses a strategic challenge that has far reaching implications beyond just
accounting
■ KPI setup/scorecard
■ SPPI test
■ (Pre-)Pricing
■ Documentation product features
■ Validation business model
■ Adjust approval process Trading/ Business ■ Update portfolio structure
Lending management
Business
■ Expand ledger structure
■ Update accounting policies and guidelines ■ New Product Process
■ Adjust ICS processes Accounting/ ■ Update/Harmonize product catalogue
Reporting/ Classification
■ Additional Capital Requirements expected ■ Monitoring individual agreements
Governance Business Processes
■ Market communication
The extensive impacts of IFRS 9 require a coordinated approach and proven solutions to minimize risks and
maximize potential
IFRS 9
■ Leverage Ratio (LR)
Impairment ■ FINREP
o Implications on both input quantities o Adaption of formal FINREP
■ Net Stable Funding Ratio (NSFR) template structure
o Direct implications most possible o Interdependencies regarding
reporting frequency and processes
■ Liquidity Coverage Ratio (LCR)
■ CRR Disclosure
o No direct implications
o Qualitative and quantitative
modifications
■ Large loan exposure limits
o will be reduced due to decrease in capital
1 Common Equity Tier 1 (regulatory „core capital“) 2Credit Risk Adjustments 3Stdandardized Approach 4 Risk Weight
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Basel III Solvability
Add. DTA
IFRS 9
CRA mult. by
tax rate
CRA CRA
Retained CET1
earnings
additional CRA partly offset by DTA
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Basel III Solvability (cont’d)
Basically,
increases Tier 2 in STA by specific CRA
capital, but capped
by 0.6 % of RWA! CRA In Standardized Approach, specific CRA (or GLLP) will
EL be deducted from the accounting value (and result into
the so-called exposure value)
Additional CRA will decrease the exposure value and
shortfall
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Basel III Ratios
Tier 1 Capital
Leverage Ratio = >3%
Exposure Value Exposure Value effect only for STA
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FINREP and CRR Disclosure
Current FINREP reporting structure is based on IAS Due to changed definitions with IFRS 9 compared to
39 IAS 39, extensions and adjustments of the disclosure
scheme more than likely
The FINREP reporting structure will need for
integration of IFRS 9 specific information Higher volatility of CRA due to migration effects and
consequential higher volatility of capital will require
There may be interaction between the forborne status
comprehensive explanation in disclosure report
with rating and stage migration, especially with change
of loan conditions Structural changes due to IFRS 9 possibly require
adjustments of data supply
FINREP reporting frequency is quarterly and thus,
CRA information is needed at least quarterly
Depending on the reporting level, the relevant forms will be prescribed by
the ECB
Downgrade level Setting up of the relevant reporting forms*
5 Classification 18 Performing
8 Classification 11 Derivatives
1 Balance 2 Income of the loans 10 Derivatives and non- 19 Forborne
financial - hedge
Data sheet statement and
liabilities - trade accounting
performing exposures
borrowings exposures
Points
4 Classification financial 9 Loan commitments, financial guarantee 12 Report on impairment of loans and 14 FV hierarchy: Financial
Over- assets and other commitments equity capital instruments instruments on FV
Simplified
3 Statement of 7 Adjusted financial assets that are cancelled or 15 Derecognition and liabilities connected to transferred
comprehensive income impaired assets
21 Tangible and intangible assets; assets within 22 Asset management and other service 30 Off-balance-sheet business: interest from non-
operating lease functions consolidated struct. comp.
44 Pension plan and social security payments 45 Classification of selected balance sheet and 46 Setup of changes in the equity capital
Full income statement items
FINREP
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A most recent message from the Basel Committee on IFRS 9 Impairment
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Involvement of stakeholders of all Functional Building Blocks required
No. Concept
0 Design Framework Functional Building Blocks overall 23 24 25 26 27 28
1 Design Framework C&M
2 Design BM & Portfolio Management
Commercial Business Front Office 1 2 10 30 Trading Business Front Office 1 2 10
Front-Office
4 Fair Value Measurement
Deposit Commission
5 Reporting & Chart of Accounts Lending Own Interest-FX- Credit Other
Banking and Fee- Payment Equity/ FX
6 Booking Engines & Posting Rules Business Issues Business Derivatives Commercial
Business earning Transactions Trade
Security
7 Internal Reporting Business Business
1 3 4 20 1 3 Business 1 3 4 20 23 20 20 3
8 Reclassification
9 Initial Application & Migration
10 Disclosure/Notes 2 3
Market and Master Data for Commercial Business 29
Business Management 2
Market and Master Data for Trading Business 3
11 Fair Value & Performance Management
12 Framework Impairment Settlement Settlement of Settlement Settlement Settlement Settlement
13 Bucket Allocation & Transfer Logic Lendings of Payment Settlement
Back-Office of Deposits Commission & Settlement of of Interest- of Credit of other
14 EL Methodology Settlement and Transactions of Security
Banking Fee-earn-ing own Issues earning Derivatives Commercial
15 Credit-impaired Assets Back Office Transactions
Transactions Business Operations business Business
16 Interest Income Recognition
17 First Time Adoption Impairment Group Internal Provider Management Retained Organisation External Provider Management
18 Disclosures / Notes Impairment
Special Topic:
Posting Rules & Reconciliation
5 1 4 5
Compliance
19 Impairment Banking Book Sub Ledger 6 8 Trading Book Sub Ledger 5 6 8
20 Internal Reporting Impairment
7 8 10
21 Hedge Accounting
28 General Ledger 5 6 8 18
Disclosures / Notes for Hedge
13 14 15
Accounting
Controlling
22 Accounting
23 Selective Topics/Professional Opinions Accounting Data Management 8
16 17 18
24 Scenario Analysis
Business Int. and ext.
25 Tax Implications Accounting
Commercial Trading Business Regulatory Financial 19 20 29
26 Harmonisation of Methods Standards and Investment
Accounting Accounting IT Reporting Controlling Tax
27 Training & Communication Financial Controlling
28 Bank Management, Planning & 3 5 7 8 3 5 7 Accounting 20 5 7 17 19 7 10 19 29 24 26
Budgeting
29 GAAP Reconciliation
Special Topic:
28 General Bank Management 1 2 4 10 29 Risk Strategy 20 10
HR Issues
Risk Mngmt.
4 11 12
Risk Controlling Data Management4
13 14 15
ALM
Controlling 16 17 18
Credit Risk Market Risk Controlling
Market Risk Determination Operational
Controlling Controlling Other Risks
Risks 20
1 2 10 20 4
IFRS 9 is not only a pure accounting project in fact the involvement of stakeholders from all areas of the bank
is required
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Implementation considerations
Overview timeline
Q2-15: Q3-15:
■Provide insight into both ■Establish BAU
Q1-15: the one-off and annual governance
Q4 2014:
■Business model impact on financial structure
■ Validate plan for
documentation reporting, regulatory ■Final decision on
Phase 2 and
completed requirements and tax accounting
secure resources
■Senior ■Mock-up disclosures policies and Q3-15:
■ Set up the PMO
stakeholder designed and accounting hedging strategy Implementation plan
and governance
communication manuals updated and senior
■ Mobilise
plan agreed stakeholder
resources
communication
completed
PHASE 1: PHASE 2: PHASE 3:
Assess Detailed analysis and design Implement
Q2-15: Q2-15:
Cash flow ■Refresh of impact analysis Q3-15:
Q3-14: characteristic following finalised ■Transfer criteria and risk parameters
Initial insight on tests standard signed-off
the potential completed ■Completion of impact ■ Skills matrices detailing current and
impact, key analysis required skill profiles developed
focus areas and ■Initial design of models, ■Existing credit policies reviewed and
required Q1-15: data flows and enhancements to align with IFRS 9
resources Hedging feasibility architecture completed made
study and review of ■Design specifications
existing hedging for data sourcing, systems, models,
strategies completed controls and processes completed
2014 2015
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Implementation considerations
Overview timeline (continued)
1 January
2017: 1 January 2018:
Q4-16:
Q1-16: IFRS 9 go-live IFRS 9 effective
Q3-15: IFRS 9 tools, applications,
Final credit (Parallel run date
■ Resources secured for Q2-16: processes, controls,
risk policies begins)
implementation Hedge knowledge and Q1-17:
■ System changes and reviewed and governance structure
documentation Remainder
timing agreed based on signed off successfully implemented
and effectiveness of IFRS 9
system specifications testing templates handed
ready Q3-16: over from
System changes programme
tested to BAU
PHASE 3: PHASE 4:
Implement Sustain
Q4-15: Q2-16:
Valuation solution built Q2-16: System
for fair value and ■Solutions to changes built
amortised cost implement ECL and configured Q1-18:
measurements model rolled Q1- 17: First IFRS
out Post 9
■Pro-forma implementa compliant
financial tion tests financial
statements and completed statement
disclosures s
drafted
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Overview Toolkit
KPMG Database with Automated decision trees & Standalone tool for Scenario tool to support the
identification of data and quantitative analysis KPMG template for an
Scope numerous market and questionnaires to speed up
data flows required for efficient definition of
product information. the portfolio screening and regarding the changes in
IFRS 9 compliant qualitative impairment
Enables KPMG iRADAR the individual decision impairment processes and
quantitative disclosures requirements and
team to produce a regarding the individual methods
documentation of status quo
classification suggestion of classification of loans
the securities portfolio with
LENDING TOOL
minimal effort
I Pe rspektive Nr. Soll-Anforderung IFRS 9 Ist-Ausprä gung Identifizie rtes Ga p Erfüllungsgra d 1 2 3 4 5 Erforderliche Anpassungen en /Betroe und A
Ke rne lem e nt 1
4 ….. ….. ….. [auswählen]
■ Rapid analysis of ■ Structured workflow for ■ Reporting and accounting ■ Quick availability of initial ■ Efficient determination of
Your
securities portfolio loan portfolio analysis data mapped to IFRS 9 IFRS 9 impacts on loan gaps between status quo
Value
disclosure requirements impairment and target scenario
■ Enlarged master data ■ Documentation of
incl. KPMG add-ons classification decisions at ■ Identification of disclosure ■ Available for use in daily ■ Enables effective and
deal level requirements that need work after correct project and
■ Complete documentation
interpretation, calculation implementation project resource planning
of classification decisions ■ Available for use during
and after implementation and /or judgment
■ Available for use during
and after implementation project
project
■ For local and global use
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Agenda
WRAP UP
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Expected Credit Losses
Approach
Scope of ■ The proposed Expected Credit Losses (ECL) model uses a dual measurement approach depending on the extent of credit deterioration New:
changes since initial recognition:
Calculate Lifetime
− Stage 1: ‘12 months’ expected credit losses’ if the credit risk has NOT increased significantly since initial recognition; and
Expected Losses in
− Stage 2/3: ‘Lifetime expected credit losses’ would be recognised if the credit risk has increased significantly since initial recognition
a new stage 2
■ Extensive new disclosures – e.g. effects of deteriorations and improvements in credit quality and the critical judgments made in measuring
the ECL accounts.
Transfer
If the credit risk on the financial
asset has increased significantly
since initial recognition
Move back
If transfer conditions above is no
longer met
■ No significant deterioration in credit quality ■ Significant increase in credit risk ■ Credit-impaired financial assets (includes
purchased and originated credit-impaired
■ 12 month expected credit losses - The portion of lifetime ■ Change relates to probability of default rather than assets)
expected credit losses that represent the ECLs that result from changes in LGD
default events occurring within the 12 months after the reporting
date, weighted by the probability of that default occurring. ■ Rebuttable presumption that the criterion for
lifetime expected credit losses is met if payment
New: are more than 30 days past due (but cf. BCBS
CAECL!)
Implement transfer
criterion from stage
Interest revenue
1 to 2 based on LtPD
Gross basis Net basis
■ Interest is calculated by applying the EIR to the gross carrying amount (i.e. before the loss allowance) ■ Interest is calculated on amortised cost (i.e. net of
loss allowance). Consistent with the amount IAS
39 requirement for all financial assets and
financial liabilities
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Expected Credit Losses
Technical accounting/risk – Key issues and trends
Expected loss
Selection of transfer criteria and indicators are required (e.g. types of downgrades and where the boundary of low risk lies).
drivers (e.g. Transfer criteria should incorporate current conditions and forecasts/forward looking information.
PD/ LGD)
More than 30 days past due rebuttable presumption to serve as a backstop, to identify financial instruments that have
Transfer experienced significant increase in credit risk, if no other forward looking, borrower-specific information available.
criteria Discount
Technical rates Assessment based on the change in the risk of a default occurring in the next 12 months permitted unless a lifetime
considerations assessment is necessary.
Assessment can be performed at counterparty level if the objectives of the expected loss model can be met.
Definition of Assessment of significant increase in credit risk on an individual vs. collective basis
Maturity
default
Flexibility of using a variety of information. Assessment can also be based on a combination of a specific internal credit rating
category; and qualitative factors that are not captured through the internal credit ratings process , if both information are
relevant.
For financial assets at FVOCI (e.g. treasury securities), the expected losses should reflect management’s expectations of
Most firms are considering the credit losses. When considering ‘best available information’, the observable market information about credit risk should be
statement about undue cost and considered.
effort to justify their choices in
estimating expected credit losses. Specific issues/trends
However, they are also conscious
of the reaction from the regulators Some firms have opted a PD based threshold and downgrade criteria; others have opted to use a their watch list/ stressed
and how they will explain any process as a way to segregate the portfolio.
differences in approach. The retail method of calculating days in arrears is usually different from commercial exposures. Firms should consider whether
a unified definition is appropriate or how to disclose differences in definitions across portfolios.
In light of the 30 days past due continues to be stressed as a backstop, a robust approach should be established to ensure
earlier position will be picked up when recognising lifetime expected credit losses.
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Expected Credit Losses
Technical accounting/risk – Key issues and trends
Low credit risk Probability of default (PD) Loss given default (LGD)
Expected loss
drivers (e.g.
PD/ LGD) Practical expedient - A financial There is a difference between Similarly, LGD as defined by IFRS 9
instrument has not significantly expected losses as defined by IFRS 9 and Basel III are different:
Transfer increased in credit risk if it has low and Basel III for firms leveraging off
criteria Discount credit risk at the end of the reporting Basel regulatory expected losses,: ■ Point-in-time versus downturn
Technical rates period. LGDs
considerations ■ Point-in-time versus through-the-
The low credit risk notion is not a cycle PDs
bright-line trigger for lifetime ECL
■ Forward-looking information would
Definition of Not required to be externally rated, need to be considered in
Maturity
default however, low credit risk equates to a assessing lifetime expected losses
global credit rating definition of
‘investment grade’, as an example.
Specific issues/trends
Specific issues/trends
Most firms recognised the need to be
Specific issues/trends as point in time PD estimates to Most firms have applied a simplistic
quantify expected credit losses .This is assumption for the assessment of
more pronounced for treasury assets expected credit losses by LGD
While this may offer some degree of segments which measure the
where in most cases market prices
operational simplification, firms economic loss incurred on a credit
and rating agency views are the main
should: exposure in the event of default.
source of information
■ Establish a credit risk framework to
define and justify their threshold of Implementation and governance over
low credit risk; forward looking measures will be
challenging
■ Implement monitoring mechanism
to track the credit risk movement of Term structures for less sophisticated
those low credit risk instruments. firms using standardised approach for
assessment of regulatory capital are
normally based on external data
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Expected Credit Losses
Technical accounting/risk – Key issues and trends (cont.)
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Expected Credit Losses
Technical accounting/risk – Key issues and trends (cont.)
Assets modification
Expected loss
drivers (e.g. The modification requirements apply to all modifications or renegotiations of contractual cash flows, regardless of
PD/ LGD)
the reason for the modification.
Transfer Modified financial assets are subject to the same assessment of significant increase in credit risk as unmodified
criteria Discount financial instruments and the same ‘symmetrical’ treatment, i.e. could revert back to 12-month expected losses.
Technical rates
considerations The credit risk on a financial asset would not automatically improve merely because the contractual cash flows
have been modified.
To assess whether there has been a significant increase in the credit risk of a modified asset, compare the risk of
Maturity Definition of default occurring at the reporting date based on the modified contractual terms and the risk of a default occurring
default at initial recognition based on the original, unmodified contractual terms.
Specific issues/trends
Appropriate modification policy and monitoring mechanisms should be established, in particular setting specific
conditions to assess whether the credit risk of the modified financial instruments has improved and whether the
criteria for the recognition of lifetime expected credit losses are no longer met. Examples of conditions to consider
are:
• an analysis of the financial condition of the borrower showing it no longer meet the criteria for recognition of
lifetime expected credit losses.
• establish a minimum period to monitor whether the credit risk of the modified financial instrument has improved
• regular payments of principal and interest amount have been made during the minimum period
• none of the exposures to the borrower is more than 30 days past-due at the end of the minimum period.
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Expected Credit Losses
Operational – Key issues and trends
The current range of maturity Specific issues/ Trends Specific issues/ Trends Specific issues/ Trends
within the industry is varied.
However, the main key success Relevant data flows are unknown or More advanced firms in this space
poorly mapped. The issues and trends in this space
criteria for more advanced firms have clear management buy-in seem to be bifurcated between firms
seems to be an ability to between the CFO and CRO
Data sources and systems have not that have a centralised data model
collaborate cross functionally versus firms that have a more
been subject to the same amount of
across traditional silos Some firms have set up overarching federated approach.
rigor as those used for financial
reporting program management to look over
various change projects to leverage By far the majority of issues lies with
Risk documentation for provisioning other projects federated systems and their
methodology is improving across the reconciliation horizontally across silos.
industry but is generally not at the
level required for financial reporting Credit risk and accounting teams have
found it difficult to speak the same For firms more advanced in
language and this potentially leads to implementation, the focus has been
multiple policy rewrites at one firm on consistency with regulatory
reporting
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Expected Credit Losses
Implementation – Specific challenges and trends
Data quality across the industry is a Many firms have identified specific Most firms with IRB risk models
?
known issue and many firms are portfolios as a pilot before rolling embedded are leveraging these
Finance
addressing these concerns through implementation out more widely. models in implementing IFRS9
specific IT projects to manage and primarily to evaluate migration across
FO maintain a single customer view rating grades.
Risk across secured and unsecured
lending products.
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Agenda
WRAP UP
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The basic idea of IFRS 9 Impairment explains some counter-intuitive behavior with
respect to the transfer criterion
Comparison of Cumulative PD
risk margins
1,5 %
Nota bene:
Comparison of
risk margins Book value minus LtEL is basically lower than the Fair
Value because the latter allow for “offsetting” the
Timeline T0 T1 T2 increased EL for each period of lifetime with the
original risk-adequate margin as part of the cash flows
risk margin needed at origination risk margin needed at reporting (only increase of LtEL effectively driving the decrease
given the rating at origination and date Tx given the rating at Tx and in FV)
the corresponding Lifetime EL the corresponding Lifetime EL
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The transfer criterion has to be applied on Lifetime-PD level so that a quantile-based
approach basically is most reasonable
x
LtPD
x
x
x
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Calculating and recognizing expected credit losses the
most significant change compared to IAS 39
1 2 3
Provisioning Cliff Effect
* Assets that are credit-impaired at acquisition or origination remain in stage 3 until maturity
The accounting treatment is decided by the IFRS 9 stage, which is a function of credit quality and deterioration
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Determining the IFRS 9 stage depends on a number of factors and can require significant
amounts of historical data
PD-Threshold Definition
(Non-investment grade) “Credit-impaired” 1yr ECL
Stage 1
Stage 2
Ft0 Ft1 Lifetime ECL
“Assets with low credit risk” Stage 3
■ IFRS 9 requires different levels of provisioning for different assets depending on whether or not there has been
significant deterioration in the past
■ Determining the correct stage requires knowledge of the current and original credit risk levels, which is information
not readily available in typical front office and risk systems
Allocating the assets to stages and providing historical information for disclosures is a new challenge that is not
possible in legacy systems and requires an extended data warehouse
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The idea of expected credit losses is nothing new, but the Basel environment is typically
limited to a 12 month horizon
■ Expected credit loss is a ■ Probability of default for ■ Loss given default based ■ Exposure at default
statistical measure used an asset or class of on losses resulting from represents the amount a
to reflect expectations of assets over the next year defaults over the next 12 bank stands to lose in the
future losses based on months event of a default event
■ PD represents an average
historical data
expectation over the ■ Ideally the LGD will be ■ For a 12 month horizon,
■ The three primary course of an entire separated for secured and the EAD is defined as the
components are derived business cycle (through- unsecured portions of an current exposure without
based on observation, the-cycle) as opposed to exposure considering payments
empirical evidence and specific current
■ LGD is a prudent ■ Undrawn commitments
expert judgment expectations (point-in-
parameter based on an are factored in using
time)
■ The objective is to assumed downturn in the statistical probabilities of
quantify loss expectations economic conditions drawing
over a 12 month forecast
Changes to existing models are necessary to comply with lifetime expected credit loss (LECL) requirements
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Extensive extensions are required to the Basel parameters to extend to a lifetime
expected credit loss
* Cost-Benefit Consideration: ■ Consider correlations between the parameters PD, LGD and EAD
Information (fulfilling the requirements above) should be used if it ■ All assumptions must be validated (conservative assumptions are not allowed)
is available “without undue cost and effort”
Extrapolating parameters and accurately forecasting cash flows are the main challenges of implementation for a
financial institution of any size
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How models should be extended or be built up in the most efficient way
Lifetime parameters or all the other needed Example: S&P Default Study
several reasons
AAA 90,23% 8,99% 0,56% 0,05% 0,08% 0,03% 0,05% 0,00%
AA 0,56% 89,94% 8,71% 0,59% 0,06% 0,08% 0,02% 0,02%
A 0,03% 1,95% 91,58% 5,80% 0,38% 0,16% 0,02% 0,07%
BBB 0,01% 0,13% 3,78% 90,90% 4,14% 0,65% 0,15% 0,24%
data, models and parameters D 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 100,00%
Lifetime models should not have unnecessary ballast Realized CPDs (dashed) vs.
CPDs calculated by 1 yr. MMX (solid) per rating class
and must be robust under the necessary validation to 100 %
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Overview on (lifetime) parameter estimation for IFRS 9 Impairment based on
Advanced IRB Basel II parameters
only LGDs based on EAD of reporting re-calculation for future periods: concept to deal with collateral market
date! e.g. with a structural model: include value fluctuations, econ. depreciations
Lt-LGD For IFRS purposes need to use EIR, expected change of collateral market Extension of LGD model
excl. internal costs & downturn add-on! value and exposure over time Pre-calc./Pricing/FV/CPM
only exposure at reporting date Roll-out cash flows, derive run-down Liquidity risk modelling
available EAD for each future period Pre-calc./Pricing/FV/CPM
Lt-EAD account for embedded options,
prolongation rights etc.
no equivalent requirement historical data of loan origin with Lt-PD data history of rating and pricing
Transfer- must be basically grounded on lifetime- for incomplete data approximations
criterion PDs necessary
e.g. transformation model Lifetime/12M
Future no equivalent requirement some adequate add-on (layer) for Stress-testing bases cases
economic may be already integrated in models models to integrate future economic research of economic department
conditions via macro-eco. input-parameters outlook for a couple of next years
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KPMG offers an efficient and value-added solution to the challenges posed by IFRS 9
KPMG’s Global Credit Loss Accounting Solution (“gCLAS”) is a full service impairment accounting solution that functions as a modular
add-on to existing accounting systems and processes. Our multi-phase delivery process provides for effective integration of the system
within the business.
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Agenda
WRAP UP
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WRAP Up
Sayisal Etki
Ön calisma
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© 2015 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of
the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All
rights reserved. The name KPMG, the logo and “cutting through
complexity” are registered trademarks of KPMG International.