Credit pricing in the light of IFRS 9 regulations
The impact of the IFRS 9 impairment model on the financial statement will be correlated to the adequacy of the pricing assessment at the time of disbursement.
The IFRS 9 accounting standard presents an impairment model where the coverage of expected losses, through provisioning, is a dynamic process which starts right from the time when credit is granted. This requires the adoption of a differentiated pricing policy based on the risk profile of the borrower, incorporating a lifetime aspect to the risk assessment. In fact, the pricing algorithms can incorporate the multi-period probability of default curves necessary to implement the IFRS 9 rules for loss assessment.
Logically, the impact of the IFRS 9 impairment model on the financial statement will be correlated to the adequacy of the pricing assessment at the time of disbursement. Pricing which is sensitive to borrower risk can in fact lead to adequate coverage of losses and risk costs, minimizing the negative impacts of the new accounting standard.
Pricing is an important factor in the credit value chain, since, together with credit policies and the definition of approval levels, it effectively translates the strategies set out in the Risk Appetite Framework (“RAF”) into operating practices to support lending and credit review activities.
Risk-based credit pricing enables the bank to:
- customize the lending process based on its cost structure and profitability targets in line with the RAF;
- optimize the commercial offering, preventing internal phenomena which subsidize riskier clients at the expense of less risky ones.