IFRS 9 versus IRB Models

Both IFRS 9 and Regulatory Internal Rating Based frameworks require the use of quantitative Credit Risk estimates. This entry summarizes their relationship^[1]

Aspect	Internal Ratings-Based Model	IFRS 9 Model
Default Definition	Specific definition based on a combination of days past due and unlikely to pay.	Consistent with Credit Risk Management practice plus rebuttable presumption that default does not occur later than 90 days past due
Lifetime vs. 12-month Horizon	Credit Rating System and associated PDs are based on a 12-month horizon	Stage 1 Assets allowances are based on a 12-month horizon. Stage 2 and stage 3 allowances are based on lifetime expected losses.
Point-in-time (PIT) vs. Through-the-cycle (TTC)	Models are generally developed using a hybrid approach (considering both cyclical and non-cyclical variables) which determines the ratings, which are then calibrated to a PD which may be somewhere between PIT and TTC.	Expected losses should reflect current conditions. This may require a PIT adjustment over historically based estimates.
Quantitative Floors	The regulatory PD has a floor at 0.03% for all exposures except sovereign counterparties.	No floor on the PD.
LGD Estimates	Conservative estimate (Downturn LGD).	Unbiased, PIT estimate.
Frequency of estimates	Annual.	Continuous basis (at least, every time Financial Statements are prepared).
Auditing of figures	Bank supervisors.	Auditors and market supervisors.

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