Moody's Corporation · NYSE:MCO
Moody's — Technical Presentation (July 2020)
30 slides from Moody's's technical presentation, Jul 9, 2020
Slide 1: East Africa Webinar Series: Classification of Financial Instruments Under IFRS 9
East Africa Webinar Series: Classification of Financial Instruments Under IFRS 9 July, 2020
Slide 2: East Africa Webinar Series
East Africa Webinar Series Episode 1 Episode 2 Episode 3 Thursday, 2 July Thursday, 9 July Thursday, 16 July 12:00 BST | 14:00 EAT 12:00 BST | 14:00 EAT 12:00 BST | 14:00 EAT Navigating Credit Risk & Classification and Stage Expected Losses: COVID-19 Allocation of Financial Risk Based Loan Pricing I
Slide 3: Speakers
Speakers Kennedy Mutisya - Chief Financial Officer Kenya Bankers Association Armen Mirzoyan – Senior Economist, Moody’s Analytics Nash Subedar – Relationship Management, Moody’s Analytics Metin Epozdemir, CFA – Risk and Finance, Moody’s Analytics Classification of Financial Instruments Under IFRS 9
Slide 4: Agenda
Agenda 1)Application of IFRS 9 in the COVID-19 environment by Mr Kennedy Mutisya, CFO, Kenya Bankers Association 2)Criteria for Significant Increase in Credit Risk (SICR) » Why SICR matters for IFRS 9 Provisions and Recent Regulatory Guidance. » Determining Significant Increase in Credit Risk and Ch
Slide 5: Application of IFRS 9 in the COVID-19 Environment
Application of IFRS 9 in the COVID-19 Environment
Slide 6: CBK Relief Measures
CBK Relief Measures • Review of the cash reserve ratio to release liquidity to banks to support distressed borrowers impacted by COVID-19 pandemic • Relief from clauses 3.2 (classification of loans), 3.3 (classification categories) and 3.5 (classification of renegotiated loans & advances) for loans
Slide 7: ICPAK Guidance
ICPAK Guidance • IFRS 9 is not expected to be applied in a mechanistic manner and is not prescriptive…… • The standard requires the application of judgement to be based on the broad principles to determine the most appropriate approaches/policies; guided by faithful presentation • Judgements should
Slide 8: Impairment Considerations
IMPAIRMENT CONSIDERATIONS • Assessment is dependent on multiple indicators, quantitative and qualitative, based on reasonable and supportable information that is forward-looking. • Significant Increase in Credit Risk considerations • Analyse the facts of each restructured financial instrument to det
Slide 9: Impairment Considerations
IMPAIRMENT CONSIDERATIONS • Some of the information to consider in determining SICR • Significant change in the operating results of borrower • Change in economic environment affecting borrower’s ability to meets financial obligations • environment affecting borrower’s ability to meets financial obl
Slide 10: Disclosures
DISCLOSURES • Enhanced disclosures in the following areas will be highly necessary: • Accounting policy for determining when a modification to a financial instrument is substantial • Sufficient disclosures of significant judgement and areas of estimation uncertainty relating to SICR and measurement
Slide 11: Thank You
Thank You
Slide 12: Criteria for Significant Increase in Credit Risk (SICR)
2 Criteria for Significant Increase in Credit Risk (SICR)
Slide 13: A Forward Looking Impairment Model
A Forward Looking Impairment Model A Primer on Expected Credit Loss for IFRS 9 Provisions Source: IFRS 9 Financial Instruments – Project Summary Presentation from IASB, July 2014 Classification of Financial Instruments Under IFRS 9 13
Slide 14: Impairment Recognition
Impairment Recognition Forward-looking “Expected Credit Loss” Model Increase in credit risk since initial recognition Stage 1 Stage 2 Stage 3 » As soon as a financial instrument is » If the credit risk increases significantly » If the credit risk of a financial asset originated or purchased from whe
Slide 15: Implications for Volatility of P&L and Capital
0.1 0.01 1 10 % 01/12/2005 01/06/2006 01/12/2006 01/06/2007 01/12/2007 01/06/2008 01/12/2008 01/06/2009 01/12/2009 01/06/2010 01/12/2010 01/06/2011 01/12/2011 Stage 2 (EUR 10,000,000 initial amount) 01/06/2012 01/12/2012 Default Probability 01/06/2013 01/12/2013 01/06/2014 01/12/2014 01/06/2015 01/1
Slide 16: Regulatory Response to Coronavirus (COVID-19)
Regulatory Response to Coronavirus (COVID-19) On Moratoria, Payment Holidays or Deferrals – ‘Our expectation is that eligibility for, and use of, the UK government’s policy on the extension of payment holidays should not automatically, other things being equal, result in the loans involved being mov
Slide 17: Staging Rules Review
Staging Rules Review List of non-exhaustive SICR Factors Classification of Financial Instruments Under IFRS 9 17
Slide 18: Transferring Criteria from Stage 1 to Stage 2
Transferring Criteria from Stage 1 to Stage 2 “ At each reporting date, an entity shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, an entity shall use the change in the risk of a default occurring over t
Slide 19: Staging Rules
Staging Rules » Qualitative staging – There are a series of characteristics that can trigger the allocation into stage 2. – Qualitative rule is determined by the Bank or the regulator. Usually, when combined with quantitative staging, it is used as an overlay. » Quantitative staging – Use statistica
Slide 20: Staging Rules
Staging Rules Qualitative Assessment There are a series of characteristics that can trigger the allocation into stage 2. The cut-off is generally agreed with the Bank and it depends on the available information and internal uses of it. Some examples: » Days overdue ≥ 30 » Early watch list: pre-defin
Slide 21: Staging Rules
Staging Rules Quantitative Assessment Account-level Reporting Lifetime PD Account-level Origination Lifetime PD » Stage allocation can be quantitatively d Distance to assess for threshold assessed using a metric that shows the 7.0% change in credit risk since initial recognition. 6.0% » To measure t
Slide 22: Threshold (Lifetime PD)
Staging Rules Quantitative Assessment Status Criteria Stage Non-Default Reporting Lifetime PD ≤ Origination Lifetime PD (observed at reporting date) + Buffer 1 Non-Default Reporting Lifetime PD > Origination Lifetime PD (observed at reporting date) + Buffer 2 Default 3 100% 90% Stage 2 Threshold (Li
Slide 23: Threshold Selection
Threshold Selection Quantitative vs Regulatory Guidance » Approach 1: Numeric optimisation – Optimize an accuracy ratio from good: bad odds analysis based on relative threshold to determine SICR. Buffer is the optimal value of d to identify SICR » Approach 2: EBA Stress Test Methodology Reference –
Slide 24: Stage Allocation
Stage Allocation Final Assessment Qualitative Quantitative Stage Example Default Assessment Assessment Allocation Case 1 No 1 1 1 Case 2 No 1 2 2 Case 3 No 2 1 2 Case 4 No 2 2 2 Case 5 Yes 1 1 3 Case 6 Yes 1 2 3 Case 7 Yes 2 1 3 Case 8 Yes 2 2 3 Classification of Financial Instruments Under IFRS 9 2
Slide 25: Implementation Example
Implementation Example Rating or Implied Rating Based Stage Allocation » Ratings based on standardized (e.g. Moody’s) credit ratings or an internal credit rating system. » Compare a PD implied rating at reporting date to the rating at origination » The reporting date rating is implied by a condition
Slide 26: Implementation Example
Implementation Example PD Based Stage Allocation » Determine the function to compare PDs: – Percent Change – Difference – Log Change » Determine the change level of the PD based on function (Relative Threshold). » Determine the threshold level of PD for determining transition to Stage 2 (Absolute Th
Slide 27: Implementation Example
Implementation Example Incorporate the Backstop Assumptions Classification of Financial Instruments Under IFRS 9 27
Slide 28: Q&A
3 Q&A
Slide 29: East Africa Webinar Series
East Africa Webinar Series Episode 1 Episode 2 Episode 3 Thursday, 2 July Thursday, 9 July Thursday, 16 July 12:00 BST | 14:00 EAT 12:00 BST | 14:00 EAT 12:00 BST | 14:00 EAT Navigating Credit Risk & Classification and Stage Risk Based Loan Pricing Expected Losses: COVID-19 Allocation of Financial I
Slide 30: Classification of Financial Instruments Under IFRS 9
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