Transition-Based Expected Credit Losses Calculation under CECL/IFRS 9

13 Pages Posted: 19 Dec 2019 Last revised: 22 Dec 2019

Date Written: March 26, 2019

Abstract

The new accounting standards, namely, IFRS 9 and CECL, require calculating the expected credit losses (ECL). In this article, we focus on the ECL calculation within the transition-based framework for retail lending products, including residential mortgages, home equity lines of credit (HELOCs), and credit cards. Given the estimated parameters, the ECL calculation for credit cards is exact, whereas the ECL calculations for mortgages and HELOCs are approximate. Particularly, we proposed an upper bound and a lower bound for mortgage ECL under mild assumptions, whereby their approximation errors are typically less than 2% and 0.2%, respectively. Moreover, compared to the path-dependent tree method, the upper and lower bounds can be computed much faster, making them practical candidates for ECL calculations on a long horizon.

Keywords: IFRS 9, CECL, Expected Credit Losses, Credit Risk, Retail Credit

JEL Classification: C41, G21, G32, M48

Suggested Citation

Kan, Kin Hung (Felix) and Xu, Rui, Transition-Based Expected Credit Losses Calculation under CECL/IFRS 9 (March 26, 2019). Available at SSRN: https://ssrn.com/abstract=3497957 or http://dx.doi.org/10.2139/ssrn.3497957

Kin Hung (Felix) Kan (Contact Author)

RBC Financial Group ( email )

Canada

Rui Xu

RBC Financial Group

Canada

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