Welcome to the second instalment of our Loss Forecasting blog series, which will show you how Experian can help you get your business IFRS 9 compliant and ready for implementation.
One of the main changes brought by IFRS 9 is the increased influence of future economic scenarios on provisioning levels.
So, what are the similarities between this and IFRS 9? Well, first of all the changes in the UK economy can have a very different impact on businesses or individuals depending on where they are in the country, the industry sector they are in or the type of household. It is how lenders understand these changes that will make the difference.
Let’s take the example of a lender which specialises in Commercial Finance. Not every business that make’s up its portfolio can respond to economic changes in the same way, because their industry sector, products, customers and culture are all different and so will be affected differently by national and global economics.
Similarly for a lender with a Consumer Finance portfolio it will be critical to understand how economic changes could affect its customers household finances by looking in detail at who they are, where they live, how their income is made up, their family structure, etc.
You’ll need to understand how your customers, businesses or individuals will behave under a range of economic scenarios, including stressed ones. For example, when interest rates start to rise, can they still afford their loan repayments and what measures you should be taking to protect both them and your organisation.
To comply with IFRS 9’s provisioning requirements; you’ll need to integrate economic forecasts into your Loss Forecasting process, taking into account how different elements of your customer base could be affected by the full range of credit risk, socio-demographic and economic factors.
Understanding how different sectors and populations within your portfolio will be impacted by changes in the economy increases the accuracy of loss forecasts and provision levels.
In turn, this can become an opportunity for your business to develop new products and identify areas of potential within your portfolios, just like the three-point shot became an opportunity to score more points and win championships for NBA teams.
Experian can help, constructing robust economic scenarios and modelling the impact these forecasts will have on your Loss Forecasts. We can model the impact of economics upon credit risk portfolios, using quality historic data, analytical expertise and highly predictive economic forecasting tools to produce model and forecasts which reflect your specific profile of customers and businesses.