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This paper presents an economically justified International Financial Reporting Standard 9 (IFRS 9) compliant solution around the impairment component related to Expected Credit Loss (ECL) modeling. Under IFRS 9 the probabilities of default (PDs) employed in ECL calculation must be real-time estimates, i.e., the PDs must be point-in-time and incorporate forward-looking information. While market indicators of future debt performance, as credit default swap (CDS) spreads and yield curves, are frequently available in the market, at least for large issuers, they cannot be used directly for PD estimates, as non-default risks, such as liquidity, transparency, and other, explain a relevant part of a fixed-income issue´s credit spread. Still, IFRS 9 requires a neutral character of PD estimations. We demonstrate how to calibrate single-name CDS implied PDs by examining the relationship between individual point-in-time forward-looking credit spreads and historically observed long-term average default frequencies. As CDS spreads are individual measures corresponding to a concrete reference entity while default frequencies represent aggregate measures across homogeneous groups of issuers, to make an economically meaningful calibration possible the CDS data must be averaged over time and rating, sector and/or geography to allow for comparison of comparable metrics. Our easy-to-implement solution specifically targeting IFRS 9 purposes is illustrated on a sample of corporate issuers. The proposed adjustment framework permits to reach better understanding by banks and financial institutions of complex ongoing interactions between the impairment and economic capital requirements in relation to credit losses
Descrição
Working Paper com arbitragem científica
Palavras-chave
Expected credit loss IFRS 9 Point-in-time probability of default Term structure of probability of default Components of CDS spreads
Contexto Educativo
Citação
Editora
ISCAL - Lisbon Accounting and Business School, Instituto Politécnico de Lisboa