Estimating Lifetime Expected Credit Losses Under IFRS 9

Abstract

We present an estimation framework of lifetime expected credit losses in accordance with IFRS 9. Rooted in the literature of estimating multi-period default probability, the framework rests on a rigorous definition of "term structure of default probability" and conditional expectation given forward-looking economic dynamics. It is easy to implement and allows banks to adopt simplified and sophisticated modeling strategies alike. We consider numerous modeling strategies within this framework, and demonstrate examples of implementation.

Keywords: IFRS 9, Lifetime Expected Credit Losses, Term Structure of Probability of Default, Multi-period Expected Credit Losses

JEL Classification: C41, G21, G32, M48