Finding Corporate Credit Cycle for IFRS 9

Abstract

Under IFRS 9, the PD component of the ECL calculation has to be Point-in-Time, and the PiT PD can be considered to be a two-factor process, idiosyncratic and systematic factors, where the systematic factors are specific to the economy. The systematic factors can be observed in corporate default information and are measurable when default data is decomposed using a signal decomposition technique such as Empirical Mode Decomposition. An alternative and simple approach is proposed to incorporate the cyclicality effect to rating models, which can be adapted by other banks for PD or other components of the ECL calculation.

Keywords: IFRS 9, Probability of Default, Expected Credit Loss, systematic factors

JEL Classification: G21,G32,G33