109. Accurate identification of drivers of credit risk, and reliable demonstration of the linkages …

Accurate identification of drivers of credit risk, and reliable demonstration of the linkages between those drivers and the level of credit risk, should be considered as critical, as a seemingly small change in a qualitative characteristic of a loan can potentially be a leading indicator of a large increase in the risk of a default occurring. Furthermore, in accordance with IFRS 9, paragraph 5.5.9, the significance of a change in credit risk since initial recognition depends on the risk of a default occurring at initial recognition. In this regard, where a credit institution uses changes in PD as a means of identifying changes in the risk of a default occurring, it should take into consideration the significance of a given change in PD expressed in a ratio (or the rate of fluctuation) proportionate to the PD at initial recognition (i.e. a change in the PD divided by the PD at initial recognition), considering also paragraph B5.5.11 of IFRS 9. However, the width of the change in PD itself (i.e. PD at measurement date minus PD at initial recognition) should also be taken into consideration.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

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