After spending time and effort building a first generation of IFRS 9 models ahead of the January 2018 deadline, lenders now find themselves facing the challenge of integrating these models into other aspects of their business, such as financial planning, forecasting and stress testing. In this blog, we explore how you can run stress tests on an IFRS 9 basis and take a look at how your peers are doing.
In a recent webinar, we used learnings gained from the first round of stress tests run under the new accounting standards, either as part of Concurrent Stress Tests (CST) or Internal Capital Adequacy Assessment Processes (ICAAP), to offer best practice guidance on:
- IFRS 9 Stress Test Modelling challenges, with specific focus on stage transitions, perfect/imperfect foresight, and how to overcome them.
- The impact of IFRS 9 on Capital and on the setting of capital buffers.
- The increased regulatory controls on stress testing models and the benefits of credit risk models integration.
Through surveying the c.150 attendees, we got some interesting insights. Here's a sample:
- Surprisingly, given the challenges, 47% said their stress testing models were either mostly or completely integrated with their IFRS 9 and/or IRB models.
- Almost a fifth (19%) have not started or do not have plans to improve their staging transition approach to integrate stress testing.
- Over two thirds (66%) have seen IFRS 9 increase stressed capital requirements.
Running stress tests under IFRS 9 has introduced significant challenges for financial organisations. Showing a good understanding of the IFRS 9 stress testing process and results is key, as a lack of confidence in the results or perceived gaps in the process can trigger the imposition of financial penalties through additional capital requirements.
For additional guidance on running IFRS 9-based stress tests, download Jaywing’s guide.