Credit Institutions are currently in the process of implementing solutions in response to the IFRS 9 Standard. In doing so, firms are preparing to navigate the numerous pitfalls of legacy systems and risk processes to deliver Expected Credit Loss (ECL) in a controlled and governed environment. The change in the way impairment is accounted for under IFRS 9, not only denotes a change in the way that information is used in order to measure ECL, but also signifies a transformation in operating models.

IFRS 9 marks a shift from a static balance sheet to forecasted losses. How to incorporate forward-looking macroeconomic scenarios into existing models and processes is seen by many as a complex methodological problem. The magnitude of this change and the impact on the overall business model has resulted in tactical solutions often being used to achieve a successful transition. However, an effective implementation should ultimately support wider business impacts which will be affected (e.g. risk appetite and loan pricing). In order to deliver the wider business needs and support timely, well controlled impairment processes, we expect firms to replace tactical solutions with more strategic risk systems and operating models.

With many firms still focussed on interpretation, modelling and analytics, some of the most significant IFRS 9 challenges still lie ahead. From our experience, examples include:

  • Solution Complexity Skyrocketing: The change in how ECL is accounted for increases implementation complexity, and the execution requirements are as a result, significantly more sophisticated than under IAS 39.
  • Data Sources Surging: The IFRS 9 Standard results in a significant increase in data required, the number of executions and data retained. This not only results in calculations requiring an increase in processing power and storage requirements but also highlights risks when sourcing accurate and reliable historical data.
  • Volume and Granularity of Outputs Expanding: The accounting change requires an increased number of calculations, scenarios and executions. This growth in outputs requires an increase in quantitative financial disclosures, and extended reporting requirements.
  • Operational Risk Increasing due to Complexity: The guidance from auditors, the BCBS and supervisors is that the process used to generate impairment outputs should be within an effective end to end control framework, including data retention, change process, execution controls and reconciliation. This requires a robust operational process supported by auditable systems.

These requirements and challenges results in notable Risk and IT resource requirements. Furthermore, the transition to the new standard has reinforced two key issues confronting lenders:

  1. Broken data pipelines, and
  2. Fragmented Risk and Finance processes.

In a world where it is estimated that we generate more than 2.5 quintillion bytes of data per day, many credit institutions still struggle to reconcile data between the risk and finance functions. This is mostly due to system leakages plus a lack of transparency and governance. These data lineage issues not only demotivate employees, as too much time is being spent on data collection, validation and reconciliation; but limits the amount of time that can be spent analysing the results. Most institutions are looking at ways to enhance and automate data gathering to meet the requirements of BCBS 239, such as setting up a central data repository (or data lake) which can act as a single source of truth. However, effective data mining and execution within an impairment calculation requires systems and processes to be functioning effectively.

Over the past two decades we have seen constant change in credit risk measurement processes. This has resulted in Risk becoming a second line processing function that introduces controls and ensures regulatory requirements are met. The function has therefore become a cost to the business, where highly skilled risk analysts spend their time servicing and executing models.

Currently we observe most firms adopting some form of a tactical implementation which we expect to significantly increase inefficiencies, introduce unnecessary complexities and ultimately increases costs. As a result the cost of compliance for implementing a tactical solution is not expected to withstand the test of time, particularly given regulatory concerns around tactical spreadsheet reliance.

Regulators have urged lenders to continue investing in their IFRS 9 capabilities. Therefore, the question is where to focus spending to maximise returns? Alternatives to strategic solutions are being investigated by firms, to deliver faster speed to market with better data, deeper insight and increased agility to market. Two options are recurring themes within these discussions:

  1. Investment in technology to deliver improved and more consistent solutions which promote increased efficiency across the business on an end to end basis. This is consistent with improved automation and digitalisation of risk and finance.
  2. Use of Managed Services to remove processing pain points around the execution of models within a controlled framework.

Therefore, the IFRS 9 Standard is an opportunity for a strategic revamp of risk systems and operations. Improved use of technology to streamline risk management systems and processes can reduce the time spent on data management and model management. This would improve the capability of the risk function as more time is now available to analyse the results and identify the right risk/reward profiles. Hence, through better systems and processes the risk function can be transformed from a costly utility to a value adding function that challenges the business. IFRS 9 is therefore an opportunity to make smart investments which would lead to wider benefit. In the end how firms do IFRS 9 today is not how firms are going to do IFRS 9 tomorrow.



Damian Hales - Partner, Risk Advisory, Deloitte

Damian is a Partner, within the Risk and Regulation practise and has over 21 years’ experience in the financial sector and specialises in Credit Risk Management across the full credit lifecycle (from origination to collections and recoveries), IFRS 9, Capital management and Programme Management. Damian leads Deloitte’s Credit Risk and Impairment Transformation offerings, sits on Deloitte’s IFRS 9 Steering Group and is a regular speaker at conferences on these topics.



Thomas Clifford - Director, Risk Advisory, Deloitte

Tom is a Director in the Financial Analytics team within Deloitte’s Risk & Regulation Group. He specialises in credit risk modelling across the banking sector, having implemented, reviewed and applied credit risk models across the full spectrum of Retail, Commercial, Corporate and Wholesale lending operations.

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Edward Venter - Assistant Manager, Risk Advisory, Deloitte

Edward Venter is an Assistant Manager in Deloitte’s Financial Risk Measurement team within Risk Advisory, specialising in the development and application of credit risk models to support financial institutions on capital allocation, loan impairment modelling and financial risk management. He has experience in various portfolios across both the retail and non-retail banking sectors.

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