Ifrs9 Ecl

CORE PRINCIPLE

ECL is FORWARD-LOOKING and PROBABILITY-WEIGHTED. It is NOT the incurred loss. It is the probability-weighted expectation of credit losses given ALL reasonable and supportable information, including future economic conditions. Never wait for objective evidence of impairment to recognise a loss.

STAGE SUMMARY

CRITICAL: Stage 3 interest is on the NET amount. Recognising Stage 3 interest on the gross amount is a material accounting error.

ECL FORMULAS

12-Month ECL (Stage 1): ECL_12 = PD_12 x LGD x EAD

Lifetime ECL (Stage 2 and 3): ECL_life = Sum_t [ PD_marginal_t x LGD_t x EAD_t x DF_t ] where t = each future period until maturity DF_t = discount factor at the asset's effective interest rate

Scenario-Weighted ECL (REQUIRED): ECL = Sum_s ( Weight_s x ECL_scenario_s ) Weights must sum to 1.0 and reflect management's genuine scenario probability assessment

DISCOUNT FACTOR TREATMENT

The discount factor (DF_t) is calculated using the asset's effective interest rate (EIR). For floating-rate instruments: use current EIR at the reporting date. For fixed-rate instruments: use the EIR at initial recognition.

DF_t = 1 / (1 + EIR)^t

Discounting matters because:

• Lifetime ECL for long-dated assets (e.g., 25-year mortgages) extends decades
• Without discounting, future losses are materially overstated in present-value terms
• The discount effect is largest for Stage 2 facilities with long remaining maturity

Example: A 1% marginal PD at year 20 with LGD 30% and EAD 100k: Undiscounted: 1% x 30% x 100k = 300 Discounted at 4% EIR: 300 / (1.04)^20 = 137 The discount effect reduces the contribution by more than half.

PD ESTIMATION

TTC PD: Long-run average over a full economic cycle — starting point only. PIT PD: REQUIRED for IFRS 9. PIT PD = TTC PD x Credit Cycle Adjustment (CCA). CCA > 1.0 in recession (PDs higher than long-run average) CCA < 1.0 in expansion (PDs lower than long-run average) CCA derived from macroeconomic satellite model — see ifrs9-scenarios.md

LGD ESTIMATION

MUST use downturn/stressed collateral values. NOT current market values. Mortgage LGD: LGD = MAX(0, EAD - Forced Sale Value) / EAD Forced Sale Value = Market Value x (1 - forced sale haircut 15-25%) Rule of thumb: LGD ~ 25-30% for LTV <= 80%; LGD ~ 35-50% for LTV > 80% Unsecured consumer: LGD ~ 65-80% Corporate unsecured senior: LGD ~ 40-60%

PORTFOLIO SEGMENTATION

ECL models must be segmented by portfolios with homogeneous risk characteristics:

EAD AND CREDIT CONVERSION FACTORS (CCF)

Term loans: EAD = scheduled outstanding balance at default Revolving facilities: EAD = Drawn balance + (CCF x Undrawn committed amount) CCF: unconditionally cancellable ~ 0-10%; committed revolving corporate ~ 50-75%

MACROECONOMIC SCENARIOS

Minimum: base + 1 upside + 1 adverse. Best practice: 4 scenarios. Weights must reflect genuine management view — equal weights rarely defensible. Common structure: Upside 15%, Base 40%, Adverse 30%, Severe 15%. See ifrs9-scenarios.md for full satellite model framework.

POST-MODEL ADJUSTMENTS (PMAs)

Required when known model limitation would cause material under/overstatement. Common types: pandemic PMA, sector concentration PMA, new product PMA, climate PMA. Each PMA must be: documented, committee-approved, time-limited, reviewed quarterly. Aggregate PMA amount must be disclosed in IFRS 7 notes. NEVER use PMAs to substitute management conservatism for model output.

PROVISION MOVEMENT TABLE

Build every quarter. Every line must trace to a documented source: Opening provision -> New business -> Stage 1->2 migration -> Stage 2->3 migration -> Cures -> Repayments -> Write-offs -> Model parameter changes -> Macro scenario changes -> PMA movements -> FX -> Closing provision

IFRS 7 MANDATORY DISCLOSURES (minimum)

1. SICR criteria (quantitative and qualitative)
2. Definition of default used
3. Write-off policy
4. Macroeconomic scenarios: names, weights, key variables
5. Sensitivity analysis: single-scenario stress
6. Stage distribution table: count and amount by stage, by product
7. Stage migration table: movements with ECL impact
8. Credit quality distribution: by rating grade or score band
9. Post-model adjustments: aggregate amount and rationale
10. Modified financial assets: amounts and conditions

OUTPUT FORMAT — ECL CALCULATION SUMMARY

ECL CALCULATION SUMMARY
Entity:             [Bank / Group name]
Reporting Date:     [YYYY-MM-DD]
Portfolio:          [Segment name]

INPUTS:
  Gross Carrying Amount:     [Amount]
  Stage Distribution:        Stage 1: [X%] | Stage 2: [Y%] | Stage 3: [Z%]
  PD (12-month, base):       [X.XX%]
  LGD:                       [X%]
  EAD:                       [Amount]
  Discount Rate (EIR):       [X.XX%]

SCENARIO ECL:
  Upside  ([W1]%):           [Amount]
  Base    ([W2]%):           [Amount]
  Adverse ([W3]%):           [Amount]
  Severe  ([W4]%):           [Amount]

WEIGHTED ECL:                [Amount]
  of which PMA:              [Amount] ([description])

PROVISION MOVEMENT:
  Opening:                   [Amount]
  Change this period:        [+/- Amount]
  Closing:                   [Amount]

NEVER DO THESE

• NEVER calculate ECL using the incurred loss methodology
• NEVER apply a single macroeconomic scenario (must be probability-weighted)
• NEVER use TTC PD without PIT conversion
• NEVER use current market value of collateral (use downturn LGD)
• NEVER recognise Stage 3 interest on the gross amount
• NEVER omit the discount factor for lifetime ECL — undiscounted lifetime ECL materially overstates the provision for long-dated assets
• NEVER use PMAs as a substitute for fixing a known model deficiency — PMAs are temporary overlays, not permanent model corrections

ALL OUTPUTS REQUIRE REVIEW BY A QUALIFIED PROFESSIONAL BEFORE USE IN REGULATORY FILINGS OR BUSINESS DECISIONS.