Low Credit Risk
Definition
Low Credit Risk, in the context of IFRS 9 [1], is an indicator assigned to financial instruments deemed to
- have low Default Risk, that is low likelihood of any credit event
- the borrower has strong capacity to meet contractual cash flow obligations both in the near term.
Under adverse changes in economic and business conditions in the longer term a low credit risk borrower may (but need not) have reduced ability to meet contractual cash flow obligations.
An instrument categorized as low credit risk does not require recognition of Lifetime Expected Credit Losses
Even if an instrument ceases to be categorized as low credit risk, recognition of lifetime expected credit losses requires that there has been a Significant Increase in Credit Risk
Determination
- Determination of the low credit risk may be based on internal credit risk ratings or other methodologies that are consistent with a globally understood definition of low credit risk and that consider the risks and the type of financial instruments that are being assessed.
- External ratings of ‘investment grade’ may be considered as having low credit risk
- Financial instruments are not required to be externally rated to be considered to have low credit risk.
- Financial instruments should be considered to have low credit risk from a market participant perspective taking into account all of the terms and conditions of the financial instrument.
Examples
As an indicative calibration, a financial instrument with an external rating of Investment Grade is an example of an instrument that may be considered to have a low credit risk
A loan is not considered to have a low credit risk simply because:
- the value of collateral results in a low risk of loss. This is because collateral affects the magnitude of the loss when default occurs (Loss Given Default, rather than the risk of default
- it has a lower risk of default relative to other financial instruments
References
- ↑ IFRS Standard 9, Financial Instruments
