The ongoing impact of the pandemic and relentless economic turmoil of the past year continue to challenge expected credit loss models (ECLs).
All businesses are obliged to re-evaluate key assumptions underpinning their existing impairment analysis and ensure they continue to incorporate data into IFRS 9 models in a rational, reliable, reasonable manner that meets the expectations of ever-vigilant regulators.
At FICO, we’re working with our strategic clients to ensure they maintain a solid risk analysis and risk modelling programme. Right now, there are a host of factors that need to be considered when calculating ongoing exposure to risk.
Unemployment – Uncertainty and operational instability are still present across numerous sectors, which may lead to the closure of some businesses and facilities.
Interest rates – Despite lowered interest rates, which are helping raise disposable income and encourage economic activity, it’s worth keeping a careful eye on the global economy too. The U.S. Federal Reserve recently slashed interest rates to 0%, but the lockdown effect still saw many at-risk businesses close.
Concentrations of risk – It’s worth being extra vigilant as to where exposure to credit risks are highest – be it by geography, region, commercial sector or customer segment.
Liquidity – With lockdowns and curfews being implemented, many corporates and households will experience a loss of income. An up-to-date assessment of the impact of expected loss of cash inflows and outflows during the coming months and years will need close attention.
Regulators – Responses from industry bodies are continually being rolled out and rapidly adapted to meet day-to-day changes. It’s crucial to keep pace.
Insurance – The pandemic is almost certain to drive even greater analysis of risk-based pricing from here on. It’s worth noting the impact this may have on products – especially if they’re underwritten with an insurance or credit life element.
Fair value – Hugely subjective right now, but any fair values of collateral that affect your ECL model will need to be revised as the market adjusts. Changes may impact your debt protections and customer recovery options in the event of a default.
Loan modifications - Where borrowers are experiencing cash flow challenges, many financial institutions favour being open to renegotiating payment terms and finding ways to provide support and relief to customers. Clearly any changes made to the original loan terms must be assessed carefully to determine the potential impact.
How we’re helping our strategic clients - As many businesses go into hibernation, or even close down, we are advising our clients on the best route forward for them and their customers every day.