Expected Credit Loss - ECL

One of the main goals of IFRS 9 is to ensure a timely and adequate set-up of valuation allowances for financial instruments to capture in the most accurate way the credit risk resulting from these financial instruments. The implementation of this standard includes not only significant changes to internal processes and systems related to the measurement of credit risk (expected credit loss), but also changes associated with the classification and measurement of financial instruments.

In our projects, we encountered various models for assessing expected credit losses, predominantly in the banking sector. Our output was an evaluation of how credit risk increases are assessed and an assessment of whether or not the expected credit loss models used by banks are appropriate. Based on this assessment, we identified weaknesses in the models or in their implementation. We focused on using data in models correctly, determining the risk-bearing parameters (PD, LGD, EAD), and, last but not least, on the final ECL calculation. Thus, our model appropriateness assessment resulted in a timely and appropriate set-up of valuation allowances.