The International Financial Reporting Standard (IFRS) 9 models need to evolve quickly. There is no doubt the pandemic’s impact on the models and framework generated stressors in unforeseen ways, creating significant challenges to banks’ loan-loss provisioning levels. There are significant competitive advantages in getting these models right.
In a modular approach, banks implement ways to evolve IFRS 9 to calculate provision levels with more accuracy, develop efficient governance, improve the customer experience, and pricing. One bank leveraged this approach to reduce its retail IFRS 9 provisions by 20 percent. Phasing out of pandemic-related measures, like moratoria on loan repayments and public guarantees, is likely to affect asset quality. Banks need to evolve their models promptly with promptness and agility—especially given the impending withdrawal of government support for many debtors. Now more than ever, banking institutions need to act and build on the lessons learned.
This article was originally published on McKinsey.com on May 23, 2022 and is reprinted here by permission.