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