Credit Risk Management has evolved to take into account IFRS 9 requirements. In the past, models used an incurred loss approach which was historical and not forward-looking.
The RBZ has ensured full implementation of IFRS 9 at Banks to enhance financial stability by reducing credit risk through the use of forward-looking impairments, i.e. expected credit losses (ECL).
The forward-looking ECLs are computed using models that take into account point in time Probability of Default, Loss Given Default and Exposure at Default parameters calibrated to factor in sensitivity to various macro-economic variables.
To ensure the reliability of models being used, banks have put in place stringent model governance frameworks, which incorporate independent model validation and automation.
FULL THREAD: RBZ On The Evolution Of Credit Risk Management
