The Cyclicality in SICR: Mortgage Modelling Under IFRS 9

26 Pages Posted: 5 Nov 2020

See all articles by Edward Gaffney

Edward Gaffney

Central Bank of Ireland

Fergal McCann

Central Bank of Ireland

Date Written: May, 2019

Abstract

Banks must make forward-looking provisions for loan losses under new international accounting standards introduced in 2018. In Europe, banks will assign performing exposures to a new “Stage 2” category with a higher provisioning penalty, if they have experienced significant increase in credit risk (SICR). We use a loan-level credit risk model and Irish residential mortgage panel data to assign performing loans into the appropriate stage. Using this technique, we characterise approximately 30 per cent of the performing Irish mortgage portfolio at end-2015 as Stage 2.We then calculate backward-looking, static estimations of Stage 2 mortgages between 2008 and 2015. This exercise suggests that loan stage assignment can be highly pro-cyclical. The share of Stage 2 among performing mortgages rises during the economic downturn to peak in 2013, after which large transitions are assigned from Stage 2 into lower-risk performing loans, as the economy improves.

Keywords: credit risk, loan provisioning, mortgage defaults, stress testing

JEL Classification: G21

Suggested Citation

Gaffney, Edward and McCann, Fergal, The Cyclicality in SICR: Mortgage Modelling Under IFRS 9 (May, 2019). ESRB: Working Paper Series No. 2019/92, Available at SSRN: https://ssrn.com/abstract=3723448 or http://dx.doi.org/10.2139/ssrn.3723448

Edward Gaffney (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Fergal McCann

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

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