IFRS 9 And The "Is It A Bird, Or Is It A Bomber?" Problem

With the adoption of the IFRS 9 accounting standard into EU law, it is full steam ahead for banks to deploy credit models that estimate Expected Credit Loss (ECL) accounting values. The standard requires firms to account for lifetime ECL on loans that have experienced a "significant increase in credit risk" (SICR), but allows firms to reach their own conclusions as to just how much credit risk ought to be viewed as "significant".

Most firms have developed their first suite of ECL models, and are able to estimate 12-month and lifetime ECL under various input assumptions such as forward economic scenarios. However, many firms have held off finalising their definition of SICR until additional forward economic scenarios have been developed. The wait-and-see approach also allows some degree of consensus in interpretation to emerge.