Estimation of Lifetime Expected Credit Losses under IFRS 9

On 24th July 2014 the IASB published the complete version of IFRS 9 Financial Instruments, which replaces most of the guidance in IAS 39. It contains a new impairment model which results in earlier recognition of losses.

New Model Development Required

This will require new developments by the banks because their current 12-month through-the-cycle PD (TTC PD) used for regulatory purposes cannot normally be used without adjustment for either assessing the change in credit risk or measuring the 12-month expected credit losses (ECL).  Following the new IFRS 9 rules banks have to make the assessment of changes in credit risk by using a 12-month point-in-time PD (PIT PD) where it would not be expected to give a different result to using lifetime PDs. The new standard does not provide any guidance on how to adjust TTC PD to PIT PD.


Our model suite LoanPilot™ is built to translate TTC PD estimates into lifetime PIT estimates to use it for stress testing and modelling of securitization. The same framework can be used in the context of IFRS irrespective of whether calculations need to take place at pool or loan level.

Prediction of stage 1, stage 2 and stage 3 IFRS expected credit losses of a residential mortgage portfolio based EBA baseline scenario.