IFRS9 Backtesting

IFRS 9 became mandatory as of January 2018. This means that financial institutions (FI) now have four full years of historical data on IFRS 9 reporting numbers available. One of the key aspects of IFRS 9, and its main difference with the Basel framework, is the requirement to make lifetime expected credit loss (LECL) estimates for facilities with a worsened credit rating. For the required yearly monitoring exercise of IFRS 9 models, it has been hard to test the accuracy of lifetime estimates.

The main reason for this is that for many products, the lifetime is not fully resolved (yet) i.e., retail mortgages typically have a maturity of 20 to 30 years. With the accumulation of more and more data, FI’s should start thinking about approaches to verify how well lifetime estimates reflect the actual lifetime credit losses. Apart from that, backtesting exercises are useful in themselves since performing them helps FI’s to gain experience in backtesting LECL estimates. This experience will be of great value in the years to come.

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