As preliminary IFRS9 results are being released, many institutions have concerns about variations in point-in-time credit assessment and forward-looking credit forecasts. These measurements are responsive to the economic environment, and highly dependent on changes in an institution's macroeconomic outlook.
Many financial institutions are designing their model overlay with a view to manage macroeconomic forecast uncertainty and model risks. For this purpose, aside from the expected credit losses, risk management teams can provide the finance department with more measurements to anticipate variability and uncertainty levels around expected credit losses. This document discusses risk measurements that can be leveraged to achieve these objectives.
For IFRS 9 impairment calculations, point-in-time forward-looking credit assessments are prone to be responsive to the economic environment and the periodic revision of the economic outlook. Therefore, the management of provision variances over time is a particular area of focus.
As financial institutions are currently focusing on the execution of their IFRS 9 program and solution integration, risk and finance teams are working together to anticipate their effect on the financial reports. Especially, on the impairment modeling side, point-in-time forward-looking credit assessments are prone to be more responsive to the surrounding economic environment than the through-the-cycle measurements in practice so far. As institutions are anticipating some variability of provisions levels in relation to evolving macro-economic assumptions as well as forecast uncertainty, the details of the macro-economic outlook and scenario assumptions as well as clarifications of provision variances over time, are set to be a particular area of focus.
To get senior stakeholders to buy in to alternative macroeconomic scenarios, risk management and ALM teams must assemble risk models and risk-adjusted performance measurements in their simulation tools. Institutions must switch from a qualitative to a quantitative approach to analysis.
This article examines how regulatory compliance initiatives worldwide have shaped current risk management systems and practices. It then covers the challenges and benefits of funds transfer pricing practices, profitability analysis, and stress testing-based governance practices.