Advancing IFRS 9: Transforming Credit Risk Management through Digitalisation

By Sanjin Bogdan, Head of IFRS at Aryza


Developed to replace the earlier IAS 39, the International Financial Reporting Standard 9 (IFRS 9) is an accounting standard issued by the International Accounting Standards Board (IASB), which introduces more principles-based guidelines to enhance the transparency and relevance of financial reporting. It addresses the classification and measurement of financial instruments, as well as the impairment of financial assets.

It aimed to provide users of financial statements with more relevant and timely information about an entity’s exposure to financial instruments and the associated risks.

Key aspects of IFRS 9 include the classification and measurement of financial instruments, a more forward-looking expected credit loss (ECL) model for assessing impairment of financial assets, and improvements to the hedge accounting requirements to better align accounting with an entity’s risk management activities.

Today, legacy IFRS 9 and credit risk management approaches are ripe for digitalisation to stay up to date with tech developments and its benefits to develop and keep a competitive edge, whilst ensuring supervisory expectations are met.

Financial institutions are conforming

Financial institutions are actively taking steps to align with the modern requirements of IFRS 9, this includes intensifying efforts in real-time data management, advanced monitoring, validations, and timely model development and updates to ensure their accuracy and reliability in rapidly changing environment.

In response to the new IFRS 9 requirements, financial institutions are increasing their technology capabilities and increasingly focusing on scenario analyses to gauge the potential effects of different economic conditions on their portfolios. To manage these changes effectively, institutions must upgrade its technology and systems to handle increased data needs and support, adequate credit risk management and ECL calculations. Strong governance frameworks and internal controls are also being established to guarantee the credibility of these calculations and projections.

Furthermore, financial institutions are collaborating across departments, including finance, risk management, and IT, to ensure a holistic and cohesive approach. Engaging with regulatory bodies and auditors helps maintain alignment with expectations. Through these comprehensive efforts, financial institutions aim to conform to IFRS 9, accurately estimate credit losses, and provide stakeholders with transparent insights into their credit risk taking practises.

Real time Credit risk management is becoming a priority

Efficient up to date monitoring and transparency about credit risks are essential when evaluating the risk and defining the cost of risk under IFRS 9. Internally, but also vis-à-vis regulators such as the ECB, Bafin or the Bank of England. The consequences of non-compliance, lack of early detection and advanced monitoring can be serious.

The pressure on banks and financial institutions to keep an eye on credit risks is growing. Most recently, the ECB has even defined those shortcomings in credit risk management and measurement of exposures to vulnerable sectors as a supervisory priority from 2023 – 2025.

The regulator highlights that banks should effectively remedy structural deficiencies in their credit risk management cycle, from loan origination to risk mitigation and monitoring, and address any deviations from regulatory requirements and supervisory expectations in a timely manner.

Internal processes leading to weak sectoral identification and industrial concentration of clients with increased credit risk are increasingly under supervisory scrutiny. The bottom line proved to be delayed monitoring process which usually depends on obsolete client data and lack of understanding of the potential macro-economic impacts on certain sectors within the portfolios.

IFRS 9 challenges

Recent research found there were several challenges financial institutions faced when it came to IFRS 9 and the cost of risk process. Fifty-five percent of respondents highlighted the number one challenge banks were facing is the number of IFRS 9 models which need to be integrated into the process and the need for frequent changes.

IFRS 9 is predictive and forward-looking, requiring reporting of significant increase in credit risk (SICR) before customers miss a payment, however 22% of research participants shared that there is a lack of sensitivity, such as late stage two recognition and direct movement from stage 1 to stage 3, without or with minimum stage 2 period assignment.

A considerable number of participants also stated both regulatory stress testing, budgeting, and forecasting under IFRS 9 was their main challenges, with 66% considering deploying forecasting, budgeting, and monitoring tools within a IFRS 9 tool to improve process efficiency. Overcoming these challenges often involves collaboration between various departments, investment in technology and data infrastructure, and ongoing training and development of staff to ensure accurate, consistent, and compliant processes.

Transforming the credit risk process

To support the IFRS 9 process, the research also found that 42% of participants used core banking solutions, 57% used specialised systems and 28% used Excel. Banks need to be looking to implement software solutions to provide assessment and cost quantification of credit risks based on reliable and up-to-date facts. By implementing the right software, banks will be able complete real time monitoring directly from the client’s accounting system and transpose it to client risk segmentation and adequate staging, which is necessary for impairment calculation under IFRS 9.

Client cash flow and financial performance must be continuously observed, monitored, and evaluated, meaning there is a need for banks to apply software which provides the classification of clients into the risk stages in real-time and which is traceable back to underlying risk factors and models used within the assessment. This can also mean that, based on real-time monitoring data, the identification of risk is performed continuously in real-time, compared to current quarterly or even yearly monitoring exercises. This is clearly a key requirement as 100% of research participants stated that the availability of real-time client financial data and credit monitoring data would significantly improve their IFRS 9 process. Due to this need, financial institutions need to find software to support real-time data access which provides detailed and seamless monitoring, drives the credit risk model updates, and enables continuous back and stress testing projections, something which can hardly be performed in legacy IFRS 9 systems.

Time is becoming increasingly critical in risk management and early deployed remedial actions are proven to be more effective. The ‘early recognition of impairments’ based on the expected loss is a core component of the regulations under IFRS 9, meaning the real-time updating of client data is therefore playing an increasingly significant role.

IFRS 9 has ushered in a new era of financial transparency, requiring institutions to enhance risk assessment and reporting. Financial entities are adapting through improved data management, collaborative efforts, and software solutions to ensure compliance and effective credit risk management. The real-time data imperative underscores the evolving landscape of accurate financial reporting and early risk recognition. As institutions advance their IFRS 9 processes, they not only meet regulatory demands but also enhancing their ability to provide reliable insights into their financial health and risk exposure, thus securing the long-term business viability and driving profitability via efficient cost of risk management.


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