Improved credit loss estimates proposed for IFRS 9

New smoothing technique claims to overcome flaws in risk rating scales

Cake
Smooth operator: algorithm tackles ECL calculations

A new method of providing smoothed estimates for probability of default could lead to better loan loss forecasting under recently introduced accounting standard IFRS 9, a new paper finds.

The technique claims to help banks make more accurate fixes on expected credit loss, or ECL, which is an important part of the new standard. It may also help for annual stress tests, such as the US Federal Reserve’s Comprehensive Capital Analysis and Review, or CCAR. Some institutions already use the technique

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