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1 2 34 5 67 8 9How to get ahead with IFRS 9

Nine lessons learned from early adopters

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The countdown to 2018

While IFRS 9 is effective for annual periods beginning on or after 1st January 2018, it is by no means certain that all lenders will meet the deadline. But one thing is for sure, the spotlight will be shone on organisations who are seen to be lagging behind or adopting inadequate approaches.

This means 2017 is a crucial make or break time for IFRS 9 implementation.

Many firms intended to have begun their parallel run phase by now, to understand and finesse their approach to the new requirements, prior to live deployment in 2018.

But market research* shows that while some retail banks are expected to parallel run in early 2017, other lenders may just be beginning to develop their solution.

In this guide, we share nine lessons learned from IFRS 9 early adopters to help you get ahead with implementation wherever you are along the path to meeting the requirements.

*Jaywing IFRS 9 Confidence Research Report 2016

of banks expect to commence parallel run in Q4 2016

33%

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Nine lessons learned from early adopters

For lenders who are lagging behind with IFRS 9 implementation, the experience from early adopters, along with advice from their service and software providers are shedding light on key issues and challenges.

At Jaywing we have helped over a dozen lenders implement the IFRS 9 standard and having developed and refined our techniques through time, we can share the lessons learned to help you get ahead.

Here are our nine key lessons that you can follow to get your IFRS 9 programme up to speed as quickly as possible...

01 Judge the right level of proportionality

02 Leverage existing tools and practices

03 Audit data as early as possible

04 Plan, budget and determine timescales

05 Establish a governance framework

06 Ensure you have the right level of expertise

07 Adopt pragmatic solutions

08 Use model validation and sensitivity techniques

09 Future proof implementation and testing

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Judge the right level of proportionality

The IFRS 9 standards make reference to ‘undue cost and effort’ which implies that the overall solution should be in proportion to the size of your organisation. Some lenders are finding it difficult to judge proportionality and determine the level of complexity they need to be compliant.

There are various pieces of guidance on proportionality from GPPC through to GREACL, and now the PRA have offered their viewpoint.

Benchmarking yourself against your peers will assist in understanding where to pitch yourself with solution complexity.

Jaywing advises prudence with respect to simplicity versus complexity, as complexity is much easier to build in through time, than it is to remove it.

“Jaywing advises prudence with respect to simplicity versus complexity.”

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Leverage existing tools and practices

Leveraging existing tools and practices was the main theme of our first IFRS 9 whitepaper, “Evolution not Revolution”, and this philosophy still remains pertinent two years after writing. In fact, this mind-set goes beyond adapting models, such as those built for IRB or stress testing to use for IFRS 9.

It encompasses the utilisation of existing policies to inform definitions under IFRS 9 all the way through to referencing internal and public data sources to fill in any data gaps.

It’s important to align the IFRS 9 solution for your business to your existing processes – this philosophy drives a robust IFRS 9 solution and helps to move your business forward at the same time, which Jaywing believes is the essence of the new standard.

“Leveraging existing tools and practices goes beyond adapting IRB or stress testing models.”

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Audit data as early as possible

Modelling the new requirements is data intensive, that’s why we recommend that you perform an audit of all the data requirements for IFRS 9 as early as possible. This may uncover issues that result in a wider project to enhance data infrastructures as part of a longer-term vision for your organisation.

We often find that many of the big banks typically have more readily available information about the economy and may already produce macro-economic forecasts, yet smaller institutions will need to find a way to incorporate this into their models.

Data availability and quality testing is a critical stage of model development and should take place as early as possible in the IFRS 9 programme to allow sufficient time to fill gaps or remediate issues.

The requirements of the IFRS 9 regulations (e.g. macro-economic forecasting) will dictate what data is required as an input to the models.

Data quality testing doesn’t end when the models are implemented, it should continue through model execution to validate the integrity of the disclosures.

It is not too late to address data issues now, but data issues that remain in live that could have been identified in the development and parallel phases, may count against you during audit.

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Plan, budget and determine timescales

No matter what size your organisation is, IFRS 9 will place a strain on your resources as you balance achieving compliance for 2018 with other BAU activities.

The model build and implementation process is likely to uncover issues, typically data related, and our experience has shown that this extends milestones and puts pressure on budgets.

The incorporation of contingency can help overcome these problems. Bringing in the right expertise at the right time can help progression whilst minimising the effect on budget.

“The model build and implementationprocess is likely to uncover issues,typically data related and this extends milestones.”

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Establish a governance framework

Successful IFRS 9 implementation requires key stakeholders from Finance, Risk, and other departments to come together to make unified decisions.

The governance framework should be established, ideally at the very beginning of your IFRS 9 programme, to ensure there is an audit trail around all key decisions.

The governance framework extends from design and development into the execution of IFRS 9 provisions, as it is likely that manual interventions will be required.

Ultimate responsibility for the final disclosures lies with the executive board - hence the importance of proper governance and control procedures.

“The governance framework should be established at the beginning, to ensure there is an audit trail around all key decisions.”

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Ensure you have the right level of expertise

Our market research shows that lenders have struggled with the unique IFRS 9 modelling requirements.

Modelling Expected Credit Losses (ECLs) on a forward-looking basis with the incorporation of macroeconomics and assessing ‘significant increases in credit risk’ are fairly novel concepts. Fulfilling these challenges together with the wider modelling tasks, requires a team of skilled and experienced credit risk modellers.

These skillsets are in high demand as having the right expertise at the right time has proven to be fundamental to achieving compliance with IFRS 9.

Whether you still need to develop a solution, or you want to validate your approach, it is always wise to seek support from the experts.

“Our market research shows that lendershave struggled with the unique IFRS 9modelling requirements due to a skills gap”

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Adopt pragmatic solutions

The nature and complexity of IFRS 9 means that many of the organisations that are furthest ahead got into that position by adopting pragmatic solutions to accelerate towards the parallel run phase.

This extends into carrying unresolved design questions into the build phase; the lesson to learn is to keep moving through the project phases even if design questions remain.

A pragmatic approach can help to address issues that arise during development and should be considered to maintain project momentum.

Some organisations have wider business objectives and may require a tactical solution to help them achieve IFRS 9 compliance while fulfilling their other long term goals.

“Many of the organisations that are furthest ahead got into that position by adopting tactical solutions to accelerate towards the parallelrun phase.”

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Use model validation and sensitivity techniques

Development and approval of the models is by no means the end of the journey. Model validation techniques must be performed to understand how the models behave under different circumstances and what the overriding effects are on the final provision numbers.

Validation techniques, such as back testing, will test the performance of the models on historic data and enable you to understand the volatility of the outputs against historic periods prior to entering parallel run phase.

In addition, devising ‘what-if’ scenarios helps to further validate the models on more extreme scenarios that haven’t necessarily been experienced within historic periods.

“Model validation techniques must be performed to understand how the models behave under different circumstances.”

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Future proof implementation and testing

IFRS 9 will almost certainly increase the complexity of your model architecture given the requirements around the calculation of Expected Credit Losses.

The models must be implemented onto a controlled environment where they can be executed and tested.

A parallel run period should do two things: one, it acts as proof that the models are implemented correctly; and two, it allows your organisation to demonstrate adequacy and stability in the provision estimates.

Future proofing implementation allows for increases in data capacity and processing due to any planned growth of your organisation.

“A parallel run period acts as proof that the models are implemented correctly and allows you to demonstrate adequacy and stability.”

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Summary

No matter where your institution is along the path to meeting IFRS 9, it’s key to learn from those who have achieved a best practice approach to the requirements.

Investing in the right software, tools and expert advice will not only help you achieve compliance, it will provide greater agility and ultimately enhance your efficiency and ability to respond to changing conditions in the marketplace.

Get in touch with our experts today:risk.jaywing.com

risk@jaywing.com

0333 370 6600

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Nevan has a wealth of experience in the development, validation, monitoring and oversight of IFRS 9 expected loss models across mortgages, current accounts, personal loans and credit cards, playing a pivotal role in the design phase of the IFRS 9 project for Nationwide, Shawbrook Bank and Coventry Building Society.

Nevan is a risk modelling and analysis specialist with nearly 12 years’ experience, acquired with major financial institutions such as first

direct, Bradford & Bingley, Morgan Stanley and HBOS. Since joining us from Equifax in 2012, he has acted as Jaywing’s lead consultant on a broad range of credit risk analytical and modelling projects across a number of financial services clients.

Nevan has a degree in applied mathematics and statistics.

About the AuthorNevan McBride – Head of Risk Practice

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About Horizon

Horizon encapsulates years’ of Jaywing regulation and credit risk expertise into one affordable, fully integrated and automated IFRS 9 modelling solution.

Horizon can help you manage all aspects of IFRS 9 impairments modelling, or be used as a validation tool. It covers PD, LGD and EAD models, forecasts of future losses and allocation of assets into the impairments stages, as well as advanced reporting dynamics.

This integrated approach to IFRS 9 compliance leverages fully adjustable model parameters, transparent and auditable modelling components and a user-friendly interface.

Find out more>>

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IFRS 9.All wrapped up.

Horizon helps by:

• Taking away requirement for model implementation environment

• Provides the modelling expertise as all the smarts are encapsulated into the software

• Used as an interim or tactical solution so you can focus on other objectives

• Produces provision numbers quickly which helps reduce burden on processes and governance and helps to produce timely disclosures

• Used to produce validation and sensitivity analysis by altering parameter settings

risk.jaywing.com

risk@jaywing.com

0333 370 6600

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Newbury | London | Sheffield | Leeds | Swindon | Sydney

Where now?

risk@jaywing.com 0333 370 6600 @jaywingsays