EBA warns banks over loan-loss model tinkering

Senior executive says methods of adjusting IFRS 9 models to “smooth” outputs should be investigated

The European Banking Authority is asking supervisors to review the practices banks use to calculate expected credit losses (ECLs), after observing what it says are instances of credit risk models being tweaked to produce more favourable numbers that result in lower provisioning.

During the pandemic, many banks rapidly revised their ECL models to reduce the variability of their loan-loss forecasts, a report by the EBA found. Many did so for the purpose of nixing the catastrophic effect of the