Loan classification under IFRS 9

IFRS 9 requires classifying non-defaulted loans in two stages depending on their credit quality evolution since initial recognition by the bank. In this paper, Vivien Brunel proposes an optimal way to perform this classification. Target values of some key performance indicators of the provisioning model emerge from the implementation of this process. In particular he computes the target value of the stage 2 ‘hit rate’ and the size of the stage 2 portfolio

Scoring and rating models have been used in the field of the granting of credit and in credit risk management for some time. In 2001, the Basel Committee required the use of internal models to be extended to capital charge measurement (Basel Committee on Banking Supervision 2001). Since then, banks and regulators have both developed statistical tools to evaluate the quality of internal rating