IFRS9: A silent revolution in banks’s business models

Original by Mc Kinsey, F.maggi, A. Natale, T. Pepanides, E. Risso, G. Schröck, 2017, 9 pagesHamster_gagarin_linkedin
hamster writter This summary note was posted on 5 October 2017, by in Finance #

A McKinsey Risk article

IFRS9 introduces a 3-stage model impairments( stage 1 is based on expected loss over 12 months while stage 2 is on life time EL, 3 is non performing)

Most effort of banks has been on the methodology and how to incorporate forward looking and macroeconomic scenarios

Strategy adjustments needed

  • Will prompt banks to reconsider their appetite for credit risk and their overall appetite framework
  • Reconsider allocation of lending to economic sectors with greater sensitivity to economic cycle
  • Need for higher loss provisions (stage 2 impairments are based on lifetime ECL). be  15 to 20 times higher
  • Unsecured exposures will be hit harder
  • Heavier average provisions penalties on for higher risk clients (counterparty rating will have a direct impact)
  • Will have to facture stage 2 in the pricing or have flexible pricing according to stage 2 migration probability
  • Need to enhance performance monitoring across all portfolios and enhance credit management to prevent stage migration
  • Need early warning signal systems
  • Deterioration is measured on facility level rather than counterparty so all facilities have to be monitored

Banks should keep an eye  on the alternative  lending sector  (grown by 20% in Europe in the last 5 years). These new competitors have less stringent requirements