Defining and comparing SICR-events for classifying impaired loans under IFRS 9

The IFRS 9 accounting standard requires the prediction of credit deterioration in financial instruments, i.e., significant increases in credit risk (SICR). However, the definition of such a SICR-event is inherently ambiguous, given its current reliance on evaluating the change in the estimated probability of default (PD) against some arbitrary threshold. We examine the shortcomings of this PD-comparison approach and propose an alternative framework for generating SICR-definitions based on three parameters: delinquency, stickiness, and the outcome period. Having varied these framework parameters, we obtain 27 unique SICR-definitions and fit logistic regression models accordingly using rich South African mortgage and macroeconomic data. For each definition and corresponding model, the resulting SICR-rates are analysed at the portfolio-level on their stability over time and their responsiveness to economic downturns. At the account-level, we compare both the accuracy and dynamicity of the SICR-predictions, and discover several interesting trends and trade-offs. These results can help any bank with appropriately setting the three framework parameters in defining SICR-events for prediction purposes. We demonstrate this process by comparing the best-performing SICR-model to the PD-comparison approach, and show the latter's inferiority as an early-warning system. Our work can therefore guide the formulation, modelling, and testing of any SICR-definition, thereby promoting the timeous recognition of credit losses; the main imperative of IFRS 9. 36 pages (including appendix), 9199 words, 13 figures