FFA Working Papers 2:001 (2020)2172

Stressing of Migration Matrices for IFRS 9 and ICAAP Calculations

Jiří Witzany
University of Economics, Prague, Faculty of Finance and Accounting, Department of Banking and Insurance

Rating transition matrices have become a workhorse of the IFRS 9 expected credit loss and ICAAP stress test modelling. The standard method to stress a through-the-cycle transition matrix is based on a single factor Gaussian model with a correlation parameter that is usually estimated on the level of a product pool. The goal of the paper is to generalize the model allowing for more general distributional assumptions and to test empirically the sensitivity of the results with respect to these assumptions and different possible approaches to the correlation parameter estimation. We are not aware of any such empirical study in the literature. The results show that this dependence is very strong with the standard approach underestimating the results, as we argue, of a more precise calculation many times. Therefore, there is a significant model risk that needs to be taken into account in ICAAP/IFRS 9 implementation and dealt with in further research.

Keywords: ICAAP, IFRS 9 provisions, correlation, Probit model, Logit model
JEL classification: C51, G20, G28

Received: January 17, 2017; Revised: February 21, 2020; Accepted: February 21, 2020; Prepublished online: March 1, 2020; Published online: January 1, 2020  Show citation

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Witzany, J. (2020). Stressing of Migration Matrices for IFRS 9 and ICAAP Calculations. FFA Working Papers, 2, Article 2020.001. https://doi.org/10.XXXX/xxx.2020.001
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