ifrs9-ecl

CORE PRINCIPLE

ECL is FORWARD-LOOKING and PROBABILITY-WEIGHTED. It is NOT the incurred loss. It is the probability-weighted expectation of credit losses given ALL reasonable and supportable information, including future economic conditions. Never wait for objective evidence of impairment to recognise a loss.

STAGE SUMMARY

Stage	Trigger	ECL Horizon	Interest Income
Stage 1	No SICR since origination	12-month ECL	On GROSS carrying amount
Stage 2	SICR since origination — see ifrs9-staging.md	Lifetime ECL	On GROSS carrying amount
Stage 3	Credit impairment occurred	Lifetime ECL	On NET carrying amount (gross - ECL)

CRITICAL: Stage 3 interest is on the NET amount. Recognising Stage 3 interest on the gross amount is a material accounting error.

ECL FORMULAS

12-Month ECL (Stage 1): ECL_12 = PD_12 x LGD x EAD

Lifetime ECL (Stage 2 and 3): ECL_life = Sum_t [ PD_marginal_t x LGD_t x EAD_t x DF_t ] where t = each future period until maturity DF_t = discount factor at the asset's effective interest rate

Scenario-Weighted ECL (REQUIRED): ECL = Sum_s ( Weight_s x ECL_scenario_s ) Weights must sum to 1.0 and reflect management's genuine scenario probability assessment

DISCOUNT FACTOR TREATMENT

The discount factor (DF_t) is calculated using the asset's effective interest rate (EIR). For floating-rate instruments: use current EIR at the reporting date. For fixed-rate instruments: use the EIR at initial recognition.

DF_t = 1 / (1 + EIR)^t

Discounting matters because:

• Lifetime ECL for long-dated assets (e.g., 25-year mortgages) extends decades
• Without discounting, future losses are materially overstated in present-value terms
• The discount effect is largest for Stage 2 facilities with long remaining maturity

Example: A 1% marginal PD at year 20 with LGD 30% and EAD 100k: Undiscounted: 1% x 30% x 100k = 300 Discounted at 4% EIR: 300 / (1.04)^20 = 137 The discount effect reduces the contribution by more than half.

PD ESTIMATION

TTC PD: Long-run average over a full economic cycle — starting point only. PIT PD: REQUIRED for IFRS 9. PIT PD = TTC PD x Credit Cycle Adjustment (CCA). CCA > 1.0 in recession (PDs higher than long-run average) CCA < 1.0 in expansion (PDs lower than long-run average) CCA derived from macroeconomic satellite model — see ifrs9-scenarios.md

LGD ESTIMATION

MUST use downturn/stressed collateral values. NOT current market values. Mortgage LGD: LGD = MAX(0, EAD - Forced Sale Value) / EAD Forced Sale Value = Market Value x (1 - forced sale haircut 15-25%) Rule of thumb: LGD ~ 25-30% for LTV <= 80%; LGD ~ 35-50% for LTV > 80% Unsecured consumer: LGD ~ 65-80% Corporate unsecured senior: LGD ~ 40-60%

PORTFOLIO SEGMENTATION

ECL models must be segmented by portfolios with homogeneous risk characteristics:

Segment	Typical PD Model	LGD Approach	Key Drivers
Retail mortgages	Behavioural scorecard	Property collateral + forced sale	LTV, income, employment
Consumer unsecured	Behavioural scorecard	Statistical cure rate model	Utilisation, bureau score
SME	Application/behavioural scorecard	Collateral-dependent	Revenue, leverage, age
Corporate	Rating model (PD master scale)	Workout LGD	Financial ratios, sector
Commercial real estate	Rating model	Property collateral	LTV, DSCR, vacancy

EAD AND CREDIT CONVERSION FACTORS (CCF)

Term loans: EAD = scheduled outstanding balance at default Revolving facilities: EAD = Drawn balance + (CCF x Undrawn committed amount) CCF: unconditionally cancellable ~ 0-10%; committed revolving corporate ~ 50-75%

MACROECONOMIC SCENARIOS

Minimum: base + 1 upside + 1 adverse. Best practice: 4 scenarios. Weights must reflect genuine management view — equal weights rarely defensible. Common structure: Upside 15%, Base 40%, Adverse 30%, Severe 15%. See ifrs9-scenarios.md for full satellite model framework.

POST-MODEL ADJUSTMENTS (PMAs)

Required when known model limitation would cause material under/overstatement. Common types: pandemic PMA, sector concentration PMA, new product PMA, climate PMA. Each PMA must be: documented, committee-approved, time-limited, reviewed quarterly. Aggregate PMA amount must be disclosed in IFRS 7 notes. NEVER use PMAs to substitute management conservatism for model output.

PROVISION MOVEMENT TABLE

Build every quarter. Every line must trace to a documented source: Opening provision -> New business -> Stage 1->2 migration -> Stage 2->3 migration -> Cures -> Repayments -> Write-offs -> Model parameter changes -> Macro scenario changes -> PMA movements -> FX -> Closing provision

IFRS 7 MANDATORY DISCLOSURES (minimum)

1. SICR criteria (quantitative and qualitative)
2. Definition of default used
3. Write-off policy
4. Macroeconomic scenarios: names, weights, key variables
5. Sensitivity analysis: single-scenario stress
6. Stage distribution table: count and amount by stage, by product
7. Stage migration table: movements with ECL impact
8. Credit quality distribution: by rating grade or score band
9. Post-model adjustments: aggregate amount and rationale
10. Modified financial assets: amounts and conditions

OUTPUT FORMAT — ECL CALCULATION SUMMARY

ECL CALCULATION SUMMARY
Entity:             [Bank / Group name]
Reporting Date:     [YYYY-MM-DD]
Portfolio:          [Segment name]

INPUTS:
  Gross Carrying Amount:     [Amount]
  Stage Distribution:        Stage 1: [X%] | Stage 2: [Y%] | Stage 3: [Z%]
  PD (12-month, base):       [X.XX%]
  LGD:                       [X%]
  EAD:                       [Amount]
  Discount Rate (EIR):       [X.XX%]

SCENARIO ECL:
  Upside  ([W1]%):           [Amount]
  Base    ([W2]%):           [Amount]
  Adverse ([W3]%):           [Amount]
  Severe  ([W4]%):           [Amount]

WEIGHTED ECL:                [Amount]
  of which PMA:              [Amount] ([description])

PROVISION MOVEMENT:
  Opening:                   [Amount]
  Change this period:        [+/- Amount]
  Closing:                   [Amount]

NEVER DO THESE

• NEVER calculate ECL using the incurred loss methodology
• NEVER apply a single macroeconomic scenario (must be probability-weighted)
• NEVER use TTC PD without PIT conversion
• NEVER use current market value of collateral (use downturn LGD)
• NEVER recognise Stage 3 interest on the gross amount
• NEVER omit the discount factor for lifetime ECL — undiscounted lifetime ECL materially overstates the provision for long-dated assets
• NEVER use PMAs as a substitute for fixing a known model deficiency — PMAs are temporary overlays, not permanent model corrections

ALL OUTPUTS REQUIRE REVIEW BY A QUALIFIED PROFESSIONAL BEFORE USE IN REGULATORY FILINGS OR BUSINESS DECISIONS.