33. Sound methodologies for assessing credit risk and measuring the level of allowances (subject to …

Sound methodologies for assessing credit risk and measuring the level of allowances (subject to exposure type, for example retail or wholesale) should, in particular:

• a. include a robust process that is designed to equip the credit institution with the ability to identify the level, nature and drivers of credit risk upon initial recognition of the lending exposure, to ensure that subsequent changes in credit risk can be identified and quantified;
• b. include criteria to duly consider the impact of forward-looking information, including macroeconomic factors. Whether the evaluation of credit risk is conducted on a collective or individual basis, a credit institution should be able to demonstrate that this consideration has occurred so that the recognition of ECL is not delayed. Such criteria should result in the identification of factors that affect repayment, whether related to borrower incentives, willingness or ability to perform on the contractual obligations, or lending exposure terms and conditions. Economic factors considered (such as unemployment rates or occupancy rates) should be relevant to the assessment and, depending on the circumstances, this may be at the international, national, regional or local level;
• c. include, for collectively evaluated exposures, a description of the basis for creating groups of portfolios of exposures with shared credit risk characteristics;
• d. identify and document the ECL assessment and measurement methods (such as a loss rate method, probability of default (PD)/loss-given-default (LGD) method, or another method) to be applied to each exposure or portfolio;
• e. document the reasons why the selected method is appropriate, especially if different ECL measurement methods are applied to different portfolios and types of individual exposures. Credit institutions should be able to explain to the competent authorities the rationale for any changes in measurement approach (for example, a move from a loss rate method to a PD/LGD method) and the quantitative impacts of such changes;
• f. document:
• i. the inputs, data and assumptions used in the allowance estimation process, such as historical loss rates, PD/LGD estimates and economic forecasts;
• ii. how the life of an exposure or portfolio is determined (including how expected prepayments and defaults have been considered);
• iii. the time period over which historical loss experience is evaluated;
• iv. any adjustments necessary for the estimation of ECL in accordance with the applicable accounting framework. For example, if current and forecasted economic conditions are different from those that existed during the historical estimation period being used, adjustments that are directionally consistent with those differences should be made. In addition, a credit institution may have experienced little to no actual losses in the historical period analysed; however, current or forward-looking conditions can differ from conditions during the historical period, and the impact of these changes on ECL should be assessed and measured;
• g. include a process for evaluating the appropriateness of significant inputs and assumptions in the ECL measurement method chosen. The basis for inputs and assumptions used in the process of the estimation of allowances should generally be consistent from period to period. Where the inputs and assumptions or the basis for these change, the rationale should be documented;
• h. identify the situations that would generally lead to changes in ECL measurement methods, inputs or assumptions from period to period (for example, a credit institution may state that a loan that had been previously evaluated on a collective basis using a PD/LGD method may be removed and evaluated individually using the discounted cash flow method upon receipt of new, borrower-specific information such as the loss of employment);
• i. consider the relevant internal and external factors that may affect ECL estimates, such as the underwriting standards applied to a lending exposure at origination and changes in industry, geographical, economic and political factors;
• j. address how ECL estimates are determined (for example historical loss rates or migration analysis as a starting point, adjusted for information on current and expected conditions). A credit institution should have an unbiased view of the uncertainty and risks in its lending activities when estimating ECL;
• k. identify what factors are considered when establishing appropriate historical time periods over which to evaluate historical loss experience. A credit institution should maintain sufficient historical loss data to provide a meaningful analysis of its credit loss experience for use as a starting point when estimating the level of allowances on a collective or individual basis;
• l. determine the extent to which the value of collateral and other credit risk mitigants affects ECL;
• m. outline the credit institution’s policies and procedures on write-offs and recoveries;
• n. require that analyses, estimates, reviews and other tasks/processes that are inputs to or outputs from the credit risk assessment and measurement process are performed by competent and well-trained staff and validated by staff who are independent of the credit institution’s lending activities. These inputs to and outputs from these functions should be well documented, and the documentation should include clear explanations supporting the analyses, estimates and reviews;
• o. document the methods used to validate models for ECL measurement (for example backtests);
• p. ensure that ECL estimates appropriately incorporate forward-looking information, including macroeconomic factors, that has not already been factored into allowances measured on an individual exposure basis. This may require management to use its experienced credit judgement to consider broad trends in the entire lending portfolio, changes in the credit institution’s business model, macroeconomic factors, etc.; and
• q. require a process to assess the overall appropriateness of allowances in accordance with the relevant accounting framework, including a regular review of ECL models.

1. Forbhreathnú

1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

3. Caighdeáin ghaolmhara

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