Sizing the Stage 2 Portfolio for IFRS 9 Provisions

Abstract

IFRS 9 norms require classifying non-defaulted loans into two stages depending on their credit quality evolution since initial recognition by the bank. In this paper, we propose an optimal way to perform this classification. Target values of some key performance indicators of the provisioning model emerge from the implementation of this process. In particular we compute the target value of the stage 2 "Hit Rate" and the size of the stage 2 portfolio.

Keywords: provisions, collective provisions, IFRS 9, loan portfolio, credit risk, scoring model

JEL Classification: C10, C60, M40, M41, M47