IFRS 9 staging sorts financial assets into three buckets by credit quality since initial recognition. Stage 1 carries a 12-month expected credit loss, Stage 2 (significant increase in credit risk) and Stage 3 (credit-impaired) carry a lifetime expected credit loss.
IFRS 9 Financial InstrumentsIFRS 9 is the IFRS Accounting Standard for financial instruments, applied since 1 January 2018. It sets how financial assets are classified and measured, requires an expected credit loss allowance from day one through a three-stage model, and sets the rules for hedge accounting.
Expected credit loss (ECL)Expected credit loss is the probability-weighted estimate of credit losses over a period, the basis of IFRS 9 loss allowances. It is usually computed as PD x LGD x EAD, discounted at the effective interest rate, over 12 months for Stage 1 and over the lifetime for Stages 2 and 3.
Significant increase in credit risk (SICR)A significant increase in credit risk is the IFRS 9 test that moves an asset from Stage 1 to Stage 2. Banks usually combine a relative change in lifetime probability of default, watchlist or forbearance flags, and the rebuttable 30 days past due backstop.
Definition of defaultUnder CRR Article 178 a borrower is in default when a material obligation is more than 90 days past due or the bank considers the borrower unlikely to pay in full without realising collateral. EBA guidelines set materiality thresholds and cure periods.
Expected credit loss (ECL)Expected credit loss is the probability-weighted estimate of credit losses over a period, the basis of IFRS 9 loss allowances. It is usually computed as PD x LGD x EAD, discounted at the effective interest rate, over 12 months for Stage 1 and over the lifetime for Stages 2 and 3.
Significant increase in credit risk (SICR)A significant increase in credit risk is the IFRS 9 test that moves an asset from Stage 1 to Stage 2. Banks usually combine a relative change in lifetime probability of default, watchlist or forbearance flags, and the rebuttable 30 days past due backstop.