IFRS9 Expected Credit Loss Estimation: Advanced Models for Estimating Portfolio Loss and Weighting Scenario Losses

Estimation of portfolio expected credit loss is required for IFRS9 regulatory purposes. It starts with the estimation of scenario loss at loan level, and then aggregated and summed up by scenario probability weights to obtain portfolio expected loss. This estimated loss can vary significantly, depen...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Yang, Bill Huajian, Wu, Biao, Cui, Kaijie, Du, Zunwei, Fei, Glenn
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2019
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Summary:Estimation of portfolio expected credit loss is required for IFRS9 regulatory purposes. It starts with the estimation of scenario loss at loan level, and then aggregated and summed up by scenario probability weights to obtain portfolio expected loss. This estimated loss can vary significantly, depending on the levels of loss severity generated by the IFSR9 models, and the probability weights chosen. There is a need for a quantitative approach for determining the weights for scenario losses. In this paper, we propose a model to estimate the expected portfolio losses brought by recession risk, and a quantitative approach for determining the scenario weights. The model and approach are validated by an empirical example, where we stress portfolio expected loss by recession risk, and calculate the scenario weights accordingly.