Accounting for default correlation in expected credit loss impairment

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Based on the successful collaboration with CWB Financial Group (supported through NSERC Engage), we**continue to analyze statistically good ways of building credit provision under a new accounting principle, the**so-called International Financial Reporting Standards (IFRS) 9. IFRS 9 requires banks to recognize expected**credit losses in a forward-looking way. Banks need to find and implement a suitable statistical way to identify**loans with a significantly increase in credit risk and build additional provisions for these loans. This leads to**challenges in recognizing credit losses earlier while avoiding higher income volatility. In this new project, we**will particularly focus on estimating and analyzing the influence of default correlation in implementing IFRS 9.**The default events of loans are often correlated, which affects the bank's risk, as correlated defaults imply a**higher probability that several loans default at the same time. The goal of this project is to find a suitable way**of treating default correlation in the framework of IFRS 9 while balancing the trade-off between recognizing**credit losses earlier while avoiding excessive income volatility.