# 1. Introduction

The ECL Workbench is a modular solution which has been designed especially for companies, banks and financial institutions with limited functional requests. The ECL Workbench covers

- Staging
- ECL calculation
- Journalization
- Report layer

## 1.1 Staging

In IFRS 9 the transfer from stage 1 to stage 2 influences the way in which ECL (Expected Credit Losses) are calculated. For stage 1, 12-month expected credit losses need to be considered for risk provisioning. For stage 2 lifetime expected credit losses need to be considered. Hence for customers, the stage assignment does not influence the calculation of the ECL because the current portfolio only contains deals with a term that does not exceed 12 months.

Nonetheless, the stage assignment for customers is relevant, as the assigned stage impacts the disclosures required by the supervisor: depending on the assigned stage, expected credit losses for individual deals must be assigned to different reporting positions.

To fulfil these requirements, the solution covers stage assignment.

We assume that, for stage assignment, the consideration of the number of days past due is sufficient for a customer. Hence in this case, the auditor requests that, besides this quantitative parameter, a qualitative parameter needs to be considered in line with GPPC.

### Model "Staging DPD"

The functionality offered, assigns individual deals to a stage using the information about the days past due. For this purpose, the number of days past due shall be delivered at individual deal level from the source.

If the number of days past due exceeds 30 days, a significant deterioration of credit quality is assumed and the individual deal will be assigned to stage 2. If the number of days past due exceeds 90 days, the individual deal will be assigned to stage 3. The underlying configuration is performed in a separate table.

### Model "Staging DPD & PD"

The model “Staging DPD & PD” considers both, number of days past due and PD for stage assignment. The PD needs to be considered as “PD changes since deal origination”. Both, the percentage of PD change since deal origination and number of days past due, need to be linked with stage 1, 2 or 3. This model will assign the stage with minor credit quality if a minimum of the configured criteria is fulfilled.

### Model "Staging DPD & Scoring"

The model “Staging DPD & Scoring” considers both, number of days past due and the change in scoring. Similar to the model “Staging DPD & PD”, this model links a quantitative and qualitative parameter for stage assignment. Instead of “relative PD changes”, this model works with relative changes in score points.

## 1.2 ECL calculation

For different stages, IFRS 9 calls for different ways of calculating expected credit losses.

As the term of the individual deals (positions) does not exceed 12 months, the formula that needs to be applied for stage 1 and stage 2 is equal.

IFRS 9 requires the consideration of probability-weighted scenarios for the calculation of ECL.

The processing of the ECL calculation is split and covered by the following models. Depending on whether a customer decides (Variant A) to use the transfer of today's PD from capital requirements to a PD (PIT) or if he decides (Variant B) to use the available historic scoring information in combination with macroeconomic parameters to derive a PD (PIT) directly, different models need to be selected:

- Variant A: Model “Macroeconomic factor”
- Variant A: Model “Transfer PD (TTC) to PD (PIT)”
- Variant B: Model “Derive PD (PIT) on the basis of historical scoring information and macroeconomic parameters”

Both variants require:

- Model “EAD calculation” as an alternative to EAD = fix carrying amount
- Model “ECL calculation”

### Model "ECL calculation"

The model “ECL calculation” calculates the expected credit loss while taking a maximum of 3 different macroeconomic scenarios into account.

It is assumed that the ECL of a scenario will always be calculated on the basis of

ECL = ∑PD * LGD * EAD * DCF(EIR)

taking specific macroeconomic parameters of the scenario into account.

### Model "EAD calculation"

This model calculates EAD for different time periods over the lifetime of a financial instrument, e.g. EAD in 3 months, 6 months, 1 year, 2 years etc. for a financial instrument with a regular repayment plan, e.g. annuity, EAD for a future period will be different to current book value due to repayments.

To reflect possible repayments, the estimated cash flow plan over the lifetime of a financial instrument will be generated on the basis of the contractual agreement.

Based on the cash flow plan, the EAD for different periods in the future will be calculated using amortised cost and adjustment of 3 months overdue which may occur before default.

### 1.2.1 Variant A - Transfer PD (TTC)

#### Model "Macroeconomic factor"

This model derives macroeconomic factors on the basis of macroeconomic parameters.

This model is solely required in case a customer decides to transfer the PD (TTC) into a PD (PIT) applying macroeconomic factors.

The model considers macroeconomic parameters for 3 different macroeconomic scenarios. These scenarios are named “Scenario 1, Scenario 2 and Scenario 3” in the model. It is up to the bank to decide for each scenario if it shall represent a baseline, upside and downside scenario or maybe two various downside scenarios in addition to the baseline scenario”.

The model studies correlation between default patterns in the past periods with relevant macroeconomic parameters available in periods. By applying the regression method, correlation can be set up between derivation of a default rate for a specific period compared with the average default rate over periods and underlying macroeconomic parameters. For each scenario, the bank needs to enter a maximum of 5 parameters for a timeline.

#### Model "Transfer PD (TTC) to PD (PIT)"

PD (TTC) is commonly used in risk management with the concept of “through the cycle (TTC)”. It is conceptually different to requirements in IFRS 9 which requires looking forware over life time of a financial instrument with consideration of economic scenarios.

The target of this model is to utilise existing PDs by applying macroeconomic factors. By adjustment via macroeconomic factors, the economic scenario in a specific period will be considered. PD (PIT) for each period in the future is calculated by applying PD (TTC) with correlation between derivation of the default rate and projected macroeconomic parameters for that period.

### 1.2.2 Variant B - PD (PIT)

#### Model "PD (PIT)"

This model derives PDs (PIT) for the lifetime of a deal directly from available historical default data and macroeconomic parameters. The PDs (PIT) will be used directly in ECL calculation in IFRS 9.

## 1.3 Journalization

For expected credit losses in stage 1 and stage 2, it is sufficient to post the expected credit loss into risk provisioning. The entire portfolio for the ECL Workbench needs to be categorised in AC. It is assumed that all AC related valuation elements such as residual capital, open amortisation and interest accrual are posted and delivered by the core system.

A common solution for the consideration of expected credit losses in the balance sheet is the posting “D Risk provision expense C risk provision”. These entries will be reversed on the following posting date. Instead of posting incremental changes in the ECL, this approach posts the full amount of ECL.

### Model "Journal Entries ECL"

This model works with a fixed accounting logic. It generates, for each individual deal, a record that contains exactly one debit entry on an expense account and one credit entry on a risk provision account.

Which account for the individual deal will be posted is subject to a configuration in a specific table. For each group of accounts (expense of risk provision), multiple general ledger accounts can be defined. For each individual deal, the appropriate general ledger account will be identified on the basis of descriptive parameters.

The output of this model is debit/credit entries at individual deal level, provided in a table or file.

## 1.4 Report layer

The solution offered, supports compliance with reporting requirements according to FINREP standards.

- Financial assets subject to impairment that are past due

- Movements in allowances and provisions for credit losses

- Transfers between impairment stages (gross basis presentation)

- Information on performing and non-performing exposures