Finding Corporate Credit Cycle for IFRS 9

Risk.net Cutting Edge, Forthcoming

26 Pages Posted: 22 Oct 2020

See all articles by Louis Brown

Louis Brown

affiliation not provided to SSRN

Xiaonan Che

Investec Bank PLC

Date Written: September 4, 2020

Abstract

Under IFRS 9, the PD component of the ECL calculation has to be Point-in-Time, and the PiT PD can be considered to be a two-factor process, idiosyncratic and systematic factors, where the systematic factors are specific to the economy. The systematic factors can be observed in corporate default information and are measurable when default data is decomposed using a signal decomposition technique such as Empirical Mode Decomposition. An alternative and simple approach is proposed to incorporate the cyclicality effect to rating models, which can be adapted by other banks for PD or other components of the ECL calculation.

Keywords: IFRS 9, Probability of Default, Expected Credit Loss, systematic factors

JEL Classification: G21,G32,G33

Suggested Citation

Brown, Louis and Che, Xiaonan, Finding Corporate Credit Cycle for IFRS 9 (September 4, 2020). Risk.net Cutting Edge, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3685808

Louis Brown

affiliation not provided to SSRN

Xiaonan Che (Contact Author)

Investec Bank PLC

30 Gresham Street
LONDON, EC2V 7QP
United Kingdom

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