Adapting the Basel II Advanced Internal-Ratings-Based Models for International Financial Reporting Standard 9

32 Pages Posted: 23 Jun 2017

See all articles by Peter Miu

Peter Miu

McMaster University - DeGroote School of Business

Bogie Ozdemir

Standard & Poor's

Date Written: June 23, 2017

Abstract

Banks around the globe are implementing International Financial Reporting Standard 9 (IFRS 9), which is a considerable effort. A key element of IFRS 9 is a forward-looking “expected loss” impairment model, which is a significant shift from the incurred-loss model. We examine how we may use advanced internal-ratings-based (A-IRB) models in the estimation of expected credit losses for IFRS 9 purposes. We highlight the necessary model adaptations required to satisfy the new accounting standard. By leveraging on the A-IRB models, banks can lessen their modeling efforts in fulfilling IFRS 9 and capture the synergy between different modeling endeavors within institutions. In outlining the proposed probability of default, loss given default and exposure at default models, we provide detailed examples of how they may be implemented on secured lending. Moreover, in discussing the issues related to the estimation of the expected credit loss for IFRS 9, we highlight the challenges involved and propose practical solutions to deal with them. For instance, we propose the use of a convexity adjustment approach to circumvent the need for assigning probabilities in multiple-scenario analysis.

Keywords: Advanced Internal-Ratings-Based (A-IRB) Approach, IFRS 9, Probability of Default (PD), Loss given Default (LGD), Exposure at Default (EaD), Expected Loss (EL)

Suggested Citation

Miu, Peter and Ozdemir, Bogie, Adapting the Basel II Advanced Internal-Ratings-Based Models for International Financial Reporting Standard 9 (June 23, 2017). Journal of Credit Risk, Vol. 13, No. 2, 2017. Available at SSRN: https://ssrn.com/abstract=2991558

Peter Miu (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext 23981 (Phone)

Bogie Ozdemir

Standard & Poor's ( email )

130 King Street West
Suite 1100, PO Box 486
Toronto, Ontario M5X 1E5
Canada

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