How the New Impairment Model Could Affect Banks’ Business Models

Hans Helbekkmo and Pankaj Kumar

To date, IFRS 9 adopters have dedicated most of their efforts to addressing technical and methodological issues in their existing models and practices. Many have determined what criteria might result in a reclassification of assets from IFRS 9, Stage 1 to Stage 2: for example, in addition to turning their 12-month loss models into lifetime loss models for both current expected credit loss (CECL) and Stage 2 assets within IFRS 9. Although this work is essential, banks that focus only on the technical aspects of the new rules run the risk of overlooking the business and strategic impact.

The lack of focus on business and strategic impact is exacerbated by the fact that most banks are running their IFRS 9 and CECL adoption programmes from their risk and finance departments, without the active involvement of business unit leaders. Risk and finance functions are developing, validating and running models that produce expected loss numbers. Business leaders’ involvement is very limited in this process, however, which means they have a limited understanding of why decisions are made and repercussions on business and strategy. And those repercussions could be significant, to say the least

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