Stressing of Migration Matrices for IFRS 9 and ICAAP Calculations

FFA Working Paper 1/2020

18 Pages Posted: 18 Mar 2020

See all articles by Jiri Witzany

Jiri Witzany

University of Economics in Prague

Date Written: February 21, 2020

Abstract

Rating transition matrices have become a workhorse of the IFRS 9 expected credit loss and ICAAP stress test modelling. The standard method to stress a through-the-cycle transition matrix is based on a single factor Gaussian model with a correlation parameter that is usually estimated on the level of a product pool. The goal of the paper is to generalize the model allowing for more general distributional assumptions and to test empirically the sensitivity of the results with respect to these assumptions and different possible approaches to the correlation parameter estimation. We are not aware of any such empirical study in the literature. The results show that this dependence is very strong with the standard approach underestimating the results, as we argue, of a more precise calculation many times. Therefore, there is a significant model risk that needs to be taken into account in ICAAP/IFRS 9 implementation and dealt with in further research.

Keywords: ICAAP, IFRS 9 provisions, correlation, Probit model, Logit model

JEL Classification: G20, G28, C51

Suggested Citation

Witzany, Jiri, Stressing of Migration Matrices for IFRS 9 and ICAAP Calculations (February 21, 2020). FFA Working Paper 1/2020 , Available at SSRN: https://ssrn.com/abstract=3542398 or http://dx.doi.org/10.2139/ssrn.3542398

Jiri Witzany (Contact Author)

University of Economics in Prague ( email )

Winston Churchilla Sq. 4
Prague 3, 130 67
Czech Republic

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