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IFRS 9 presents a new world for Canadian financial institutions beginning January 1st 2018
By Darryl Ivan, National Lead for Risk, SAS Canada
That’s when new reporting standards, developed after the debacle of 2008-2009 almost destroyed the international financial system, take effect. And while Canada’s FI’s held to more responsible standards than those of other countries, they’ll still be held to the conditions created by the International Accounting Standards Board (IASB) in response to the virtual flameout of the market in those years.
IFRS 9 is a set of reporting standards that puts higher demands on FIs in terms of not just reporting credit losses, but forecasting them, predicting them, anticipating them. FIs will not just be required to report on creditors who have lapsed; they’ll have to predict which ones could be expected to become credit losses.
Past due loans are a lagging indicator of potential creditor deterioration. Thus, banks will be required to meet a set of standards that account for loans that could go wrong, through a number of processes and mechanisms.
* Banks will have to set aside more reserves to protect against possible losses. This will have a palpable impact on earnings.
* Bank valuations will also be affected by future volatility.
* FIs will have to make significant investments to changing their credit loss models, changing workflow structures and data management architectures.
That’s only the headline. There’s a lot of work to be done to meet IFRS 9 regulations, and frankly, there’s not a lot of time.
FORTUNATELY, IT STARTS WITH THE DATA
FIs are probably the best harvesters of data among any industry. This puts them in a unique position to put data to work. However, how it’s put to work has to change under the new regulations.
* While FIs typically forecast potential losses over a one-year horizon, they’ll now be required to forecast losses over the life of the loan. That requires different risk modeling.
* FIs will also have to take into account longer-term macroeconomic scenarios—perhaps up to 12 years.
* They will have to calculate risk at the transaction level, not the portfolio level or the macroeconomic level.
It’s a brand new game. Good thing we have all that data.
UNFORTUNATELY, IT STARTS WITH THE DATA
For data to be usable in an IFRS 9 context, there are several conditions. Collecting data is Step 1. Ensuring said data is collected properly is Step 2. Ensuring it is formatted correctly is Step 3.
Ensuring it is usable in an analytics context is the most important step. All the data in the world, personal, macroeconomic, climatalogical, is worthless unless it can be used in an analytical context. Frankly, a client’s marital status and the number of his or her children is pointless unless that data is usable in an analytical context.
Managing data has become table stakes. You have less than two years to ensure it’s in a state that will allow new models, new requirements, new business opportunities to be created. You can learn more about technologies that can help you on your journey to compliance by reading this IIA research paper or tune into the upcoming webinar: IFRS 9 Compliance: A Continuing Saga which will explore the challenges and opportunities related to IFRS 9 and provide insights into how financial services institutions can optimize for both.