The Evolution of IFRS 9 Models in Banking: A Crucial Transformation

Adaptation is key. As banks worldwide grapple with unforeseen challenges posed by events like the COVID-19 pandemic, the importance of evolving the International Financial Reporting Standard (IFRS) 9 models has never been clearer. In fact, banks that perfect this evolution can enjoy considerable advantages over their competitors.

Why the Need for Evolution?

A mere few years after the introduction of the IFRS 9, the world was hit by the COVID-19 pandemic. This unforeseen crisis placed unprecedented stress on the IFRS 9 framework, especially in the arena of loan-loss provisioning levels for banks. With additional concerns like the European energy supply insecurity and global inflationary pressures, the banking sector is in a tumultuous phase.

Banks, sensing these waves of change, have been strategizing to recalibrate their IFRS 9 expected-credit-loss (ECL) framework. The goal is to make them more accurate and incorporate lessons from recent events. But with the future economic outlook remaining uncertain, new challenges continue to emerge.

Insights from Regulatory Bodies

In line with these developments, the European Central Bank undertook a review to gauge how prepared banks are to handle an anticipated surge in distressed debtors. To aid banks, a five-part modular approach has been proposed that can help institutions hone their IFRS 9, potentially boosting its accuracy, governance, pricing, and customer experience. A notable success story is of a bank that utilized this approach to slash its retail IFRS 9 provisions by a remarkable 20%.

Additionally, a detailed report by the European Banking Authority (EBA) evaluated the ECL frameworks of banks in the EU during the pandemic. Some insights from the report include:

  1. An uptick in the loan-loss rate for stage 1 and 21 credit exposures in 2020.
  2. The expected impact on asset quality due to the withdrawal of pandemic-related financial relief measures.
  3. Varied cost of risk (COR) across banks due to differences in risk profiles and methodologies.
  4. The continued rise of stage 2 exposures and ECL amounts, especially during 2021.

Lenders using the IFRS 9 models, in light of these trends, encountered myriad challenges, from incomplete data for credit risk assessment to insensitivity to forward-looking information.

A Comprehensive Modular Approach to Addressing IFRS 9 Challenges

A 2021 survey of commercial banks across Europe shed further light on the situation. Most respondents indicated an inclination towards model redevelopment to refine ECL estimates and to align with supervisory expectations. The survey highlighted:

  1. The impact of the pandemic and related policies.
  2. Implications for bank capital.
  3. Challenges in modeling.
  4. Supervisory developments.

To address these findings, a five-part modular approach has been suggested to aid banks in refining their IFRS 9 models.

Modular Approach in Action

A prominent European bank successfully deployed the modular approach, discerning that their provisioning was overly conservative. With the application of this approach, the bank managed to identify eight levers to improve accuracy in its IFRS 9 provisions. The outcome? A 20% cut in their retail IFRS provisions.

However, as EU regulators provide guidelines on IFRS 9 application in the wake of the pandemic, the onus largely rests on banks. The looming end of government support for numerous debtors emphasizes the urgency for banks to refine their models. Perfecting these models could be the difference between mere survival and significant competitive advantage for banks in the upcoming years.


In today’s uncertain financial environment, banks can’t afford to be complacent. The timely evolution of IFRS 9 models is no longer just a regulatory requirement—it’s a strategic imperative for competitive advantage, efficient governance, optimal pricing, and enhanced customer experiences.

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