The cyclicality in SICR: mortgage modelling under IFRS 9

Edward Gaffney and Fergal McCann
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Edward Gaffney: Central Bank of Ireland
Fergal McCann: Central Bank of Ireland
Authors registered in the RePEc Author Service: Benedikt Mario Kolb

No 16/RT/18, Research Technical Papers from Central Bank of Ireland

Abstract: Banks must make forward-looking provisions for loan losses under new international accounting standards introduced in 2018. In Europe, banks will assign performing exposures to a new “Stage 2” category with a higher provisioning penalty, if they have experienced significant increase in credit risk (SICR). We use a loan-level credit risk model and Irish residential mortgage panel data to assign performing loans into the appropriate stage. Using this technique, we characterise approximately 30 per cent of the performing Irish mortgage portfolio at end-2015 as Stage 2. We then calculate backward-looking, static estimations of Stage 2 mortgages between 2008 and 2015. This exercise suggests that loan stage assignment can be highly pro-cyclical. The share of Stage 2 among performing mortgages rises during the economic downturn to peak in 2013, after which large transitions are assigned from Stage 2 into lower risk performing loans, as the economy improves.

Keywords: Mortgage defaults; credit risk; stress testing; loan provisioning (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2018-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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https://www.centralbank.ie/docs/default-source/pub ... mccann).pdf?sfvrsn=4 (application/pdf)

Related works:
Working Paper: Monetary policy communication shocks and the macroeconomy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cbi:wpaper:15/rt/18

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