Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective

IMF Working Papers, July 3, 2020

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The objective of this paper is to present an integrated tool suite for IFRS 9- and CECL-compatible estimation in top-down solvency stress tests.
The tool suite serves as an illustration for institutions wishing to include accounting-based approaches for credit risk modeling in top-down stress tests.
The tool suite is made available online along with this paper.

Provides an integrated tool suite designed to be IFRS 9- and CECL-compatible for top-down solvency stress testing.
Demonstrates how accounting-based approaches for credit risk modeling can be included in top-down stress tests.
Emphasizes top-down, bank-portfolio level modeling for loan loss provisions and expected credit losses.

Accounting regime: IFRS 9, CECL
Modeling elements: lifetime probability of default, LGD modeling, transition matrix, Lt-ECL ratio, provision flow, provision stock
Portfolio focus: bank portfolio model, loans, distressed assets, stocks, financial asset
Context: financial institutions, financial regulation and supervision, financial sector policy and analysis, stress testing

Intended for institutions and authorities conducting solvency stress tests who wish to incorporate accounting-based credit risk approaches.
Tool suite functions as an illustrative implementation to support operationalization of IFRS 9- and CECL-consistent expected credit loss estimation in top-down frameworks.

The paper is categorized under subjects: Distressed assets, Financial institutions, Financial regulation and supervision, Financial sector policy and analysis, International Financial Reporting Standards, Loans, Stocks, Stress testing.
Keywords provided: accounting regime, balance sheet, bank portfolio model, bank-portfolio level, CECL, Credit risk, Distressed assets, financial asset, Global, IFRS 9, interest rate, International Financial Reporting Standards, LGD modeling, lifetime probability of default, Loan loss provisions, Loans, Lt-ECL ratio, modeling choice, provision flow, provision stock, Stocks, Stress testing, transition matrix, WP.
Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Content summarized from "Expected Credit Loss Modeling from a Top-Down Stress Testing Perspective", IMF Working Papers, July 3, 2020.