Probabilities of Default for Impairment Under IFRS 9

6 Pages Posted: 2 Nov 2015

Date Written: November 2, 2015

Abstract

Probabilities of default built for regulatory purposes cannot be applied directly to expected credit losses impairment calculations under the IFRS 9 new standard. This is because the regulatory framework requires stressed through-the-cycle (TTC) probabilities, so as to avoid a procyclical capital charge calculation, while IFRS 9 requires point-in-time (PIT) probabilities that include forward looking information.

However the model (Asymptotic Single Risk Factor model or similar) that is generally used for the construction of stressed TTC probabilities of default can still be used to build forward looking PIT probabilities of default, provided it is made explanatory so as to obtain probabilities that are conditional on current and forecast economic conditions.

This note explores how this can be achieved, thus leveraging on developments that institutions have already made in order to comply with regulatory requirements.

Keywords: Rating Migration, Migration Matrices, Probability of Default, Through-the-Cycle, TTC, Point-in-Time, PIT, IFRS 9, Impairment, Expected Credit Losses, ASRF, Macroeconomic variables

JEL Classification: C13, C22, C51, C53, E37, G28, G33, M41

Suggested Citation

Conze, Antoine, Probabilities of Default for Impairment Under IFRS 9 (November 2, 2015). Available at SSRN: https://ssrn.com/abstract=2685099 or http://dx.doi.org/10.2139/ssrn.2685099

Antoine Conze (Contact Author)

Hiram Finance ( email )

11 avenue Delcassé
Paris, 75008
France

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