Credit Loss in Translation: Informing Bank Provisions and Capital Buffer Requirements with Forward-Looking Credit Loss Distributions

IMF Working Papers, November 7, 2025

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Develops a semi-structural, simulation-based model framework to derive forward-looking credit loss distributions for banks' credit exposures.
Designed uses:
- Assessing the adequacy of provisions at the bank-portfolio level.
- Macro stress testing.
- Informing the sufficiency of capital requirements from both micro- and macro-prudential perspectives.
Emphasizes generating model-based credit loss distributions that can be made compatible with IFRS 9 or any other accounting regime.
Model codes are made available online along with the paper.

Semi-structural and simulation-based approach.
Relies on a large number of simulated macro-financial scenarios rather than handpicked scenarios and ad-hoc scenario weights.
Produces full credit loss distributions (forward-looking) for bank portfolios rather than point estimates.

Micro-prudential application:
- Assess adequacy of provisions at the bank-portfolio level.
Macro-prudential application:
- Inform macro stress testing frameworks.
- Inform the sufficiency and calibration of capital requirements, including countercyclical considerations.
Compatibility with accounting regimes:
- Framework can be aligned with IFRS 9 provisioning requirements or other accounting rules to support policy and supervisory use.

Subjects: Collateral, Commercial banks, Countercyclical capital buffers, Credit, Financial institutions, Financial regulation and supervision, Loans, Money, Mortgages.
Keywords: bank-portfolio level, Collateral, Commercial banks, countercyclical capital buffer, Countercyclical capital buffers, Credit, credit loss, Credit loss modeling, Global, IMF working papers, Loans, loss distribution, macroprudential policy, micro-prudential policy, Mortgages, North America, provisioning.