Despite regulations being designed to simplify compliance processes and minimise credit risk, the pace of change in the financial services world is so fast that staying on top of these changes can be challenging.
The IFRS 9 is one such example. Since it came into force four years ago, we’ve suffered from a global pandemic, the increased use of buy now, pay later (BNPL), and the rise of cryptocurrencies. Now we’re looking ahead to more economic uncertainty as the
cost of living crisis hits household’s disposable income and once again increases credit risk.
So while the IFRS 9 might have been an improvement on its predecessor (IAS 39), meeting the new standard can still be a challenge for lenders.
For one thing, data is often limited or siloed in different systems so it’s difficult to accurately forecast Expected Credit Losses (ECLs) at the speed required, taking into account continual changes in the economic environment. To avoid dramatically increasing
workloads, the only option is to take on more staff and incur higher costs.
Furthermore, reporting discrepancies on the balance sheet means the correct level of risk and impairment isn’t identified, which could lead to poor decisions and financial performance, or even a market crash. Another issue is that manually-calculated projections
are liable to human error.
The purpose of the IFRS is, as the
ICAEW puts it, to ‘improve the quality of information about credit risk updated on a timely basis’. In today’s world, this can only be achieved by using digital tools to standardise reporting, such as Aryza Evaluate. This is because they allow you to draw
on data from multiple sources, including transactional data from accounting and lending solutions, and run weighted scenarios with multiple calculations to get a highly accurate view of losses and future financial performance. Specifically, these tools can
drive improvements across three key areas:
-
Impairment: Accurately calculate expected impairment to get a clearer picture of losses.
-
Risk parameters: Use new and existing models to determine changing risk parameters such as probability of default, expected loss given default, and credit conversion factor.
-
Resilience: In a fast-moving world, having the capabilities to continually test resilience is critical. This can include everything from EBA and climate stress tests to the risks that individuals pose. The results of these stress tests give lenders an opportunity
to put safeguards in place to weather any shocks, like limiting the credit of credit to certain customers and their building financial reserves.
With the pace of innovation showing no sign of slowing, it’s essential that businesses operating across the financial services sector can keep pace with the regulatory changes to protect both themselves and their customers.
