Impairment Models Based

on Expected Loss and

Compliance to IFRS 9
Wolfgang Reitgruber
Carlos Antonio Campos Nogueira
N 92
September 2015

9 2>
Reject Inference: DEA: Banks' Operating
A Comparison Revenue on the Banking Products
of Methodologies Production Function and Services Pricing
Felipe Domingues Araujo Eduardo Borges da Silva David F. Hastings
Guilherme Barreto Fernandes Dany Rafael Fonseca Mendes 55
9 772 177 60 311 7 30 Giovanna Valadares Borges
Michel Angelo C. de Oliveira
44

Impairment Models Based on Expected
Loss and Compliance to IFRS 9
Wolfgang Reitgruber
Carlos Antonio Campos Nogueira
Reject Inference:
A Comparison of Methodologies
Felipe Domingues Araujo
Guilherme Barreto Fernandes
DEA: Banks Operating Revenue
on the Production Function
Eduardo Borges da Silva
Dany Rafael Fonseca Mendes
Giovanna Valadares Borges
Michel Angelo Constantino de Oliveira
Banking Products and Services Pricing
David F. Hastings
3
07
The new rules set by the IFRS 9 and accepted
by the BCBS require recognizing losses over the
course of the maturity of exposures. In addition,
the new rules require acknowledging signs of cre-
dit quality deterioration while estimating those los-
ses, even if this occurs prior to their recognition as
incurred. This is what has become known as the
Impairment Model. The article outlines a comple-
te methodology for compliance with these requi-
rements, revolving around the concept of Risk Im-
pact.
30
The use of statistical models to support credit
granting decisions is an established practice in
the financial market. However, the very credit se-
lection policy creates a sampling bias that may
lead to ill-fitting models and the approval of high-
-risk operations and rejection of low-risk ones. Re-
ject inference models seek to address this bias,
and this article presents four methodologies to
this end, later comparing them by means of appli-
cation to two real databases.
44
This article uses DEA (Data Envelopment Analysis)
to evaluate the efficiency of the main financial ins-
titutions active in Brazil since the 2008 internatio-
nal crisis. Taking Operating Return as an output,
the findings favor domestic (private- and public-
-sector) banks, which maintained a lead over fo-
reign-owned banks. It is worth noting that domes-
tic public-sector banks ranked first in 2009, playing
a leverage role in market financial operations du-
ring a period of international financial crisis.
55
Setting the selling price for the good or service
offered is crucial to the success of any enterprise.
It is no different with banks. However, when it co-
mes to extending bank loans (and taking bank de-
posits), the task is different and more complex
than for other business activities, even though the
rationale is similar.
 7

Impairment Models Based

on Expected Loss and
Compliance to IFRS 9

Wolfgang Reitgruber1
Carlos Antonio Campos Nogueira
1 The presented opinions and methods in this paper are solely the responsibility of the authors and should not be interpreted as
reflecting those of UniCredit Bank Austria AG or of any of the authors former employers.
The concepts and terms Impact of Risk , IoR , iACV , PL Dashboard and NPL Dashboard are copyright by Wolfgang

Reitgruber, all rights reserved. For commercial, profit-oriented or capital-optimizing applications of these concepts (either within
a corporation or for consulting/training purpose), written permission by Wolfgang Reitgruber is required.
 8

Abstract
Even though the Basel Accord requires a one-ye-
ar horizon on the risk parameters, and local provisioning prac-
tices and rules take into account already incurred losses, the
new IFRS 9 standards, as released in July 2014, and already ac-
cepted by the Basel Committee, demand the recognition of ex-
pected future losses during the whole exposures maturity (the
forward looking principle). Moreover, and in tune with that
principle, the same standards require that banks figure out any
signs of impaired creditworthiness that might impact the futu-
re behavior of otherwise (currently) performing loans. That is
what has come to be named impairment model. In this arti-
cle we outline a comprehensive methodology to tackle such re-
quirements, centered in the Impact of Risk (IoR) concept.

Keywords: Credit risk, PD, EAD, LGD, risk level,

risk profile, expected loss, cost of risk, Basel II, IRBA, im-
pairment, economic cycle, loan loss provisions, backtes-
ting, Impact of Risk, IoR, iACV, IFRS 9, Resoluo 2682.

1. Introduction
After many years of preparation, development of drafts and feedback
sessions, the final standard of IFRS 9 impairment was released in July 2014. The
change from an incurred loss model to an expected loss model for loan loss pro-
visioning was kicked-off. Methodological and stochastic concepts of credit risk,
so far mostly used in internal steering, in regulatory context for IRBA segments
and in modeling economic capital, will enter the area of accounting and provisio-
ning. And local supervisors such as Banco Central do Brasil will have to apply
some important changes to the standard chart of accounts (COSIF) and current
account practices in order to comply to IFRS 9 and, at the same time, avoid or at
least reduce the need of inconvenient (and error prone) double booking.
This article presents methodological arguments and proposes ways how
to approach certain issues in IFRS 9 impairment modelling.
It starts with a detailed discussion of the structural conservatism in the
final standard. The exposure value outlined in the first exposure draft 2009 (ED
2009) will be specified and introduced as iACV (idealized Amortized Cost Va-
lue). It is fair under the economic theory of amortized cost accounting and
consequently provides a valid benchmark for the IFRS 9 net exposure value. The-
 9

refore, iACV can be used to quantify conservatism (potential hidden reserves or

liabilities) in the actual implementation of the final standard and to separate ope-
rational side effects from real risk impacts.
It continues with a quantification of expected credit losses based on Im-
pact of Risk instead of traditional cost of risk. An objective framework is sug-
gested which allows for improved testing of forward looking credit risk estima-
tes during credit cycles. This framework will prove useful to mitigate overly pro-
-cyclical provisioning and earnings volatility.
Closing its main content, it mentions the LGD backtesting methodology, le-
aving the details to the first reference (Reitgruber, 2015) listed next to end of it and
stressing the need to adapt it in order to fit local standards e practices, as well as the
stage of Basel II implementation in the Brazilian financial institutions (FIs).
The expectations on the quality of credit risk parameters under the final
standard of IFRS 9 impairment (short: the final standard) are at least as serious
as for IRBA: Loan loss provisions need to be based on unbiased and objectively
justified methods, considering all reasonable information concerning past and
present information, and future expectations (forward looking).
Only the actual implementation and the interpretation of the final stan-
dard by financial institutions and auditors will prove how far these expectations
can be met in real life. Even the standard setters themselves are aware of this
uncertainty: cannot quantify the magnitude of the impact of moving to the new
impairment model on an entitys financial reporting ... While all entities will be requi-
red to meet the objective of the impairment requirements , in practice, the loss allo-
wance will depend in part on how entities operationalize IFRS 9.
This paper primarily refers to the final standard on impairment, as relea-
sed in July 2014 by the IASB. The proposed methods or interpretations are par-
tly hypothetical and may have to be adjusted depending on how certain rules are
finally implemented or interpreted. Although all suggestions were developed in
good faith, the author does not assume any further responsibility. Before imple-
menting the proposed methods, any relevant updates or current interpretations
of the standard have to be considered adequately.
After a short outline of the methodological framework, the analytical
part of this paper will focus on the following topics:
The final standard as approximation of a methodologically clean approach.
It will be shown, how the method introduced with the exposure draft 2009
(the ED 2009) provides a basis for an unbiased, fair and generic benchma-
rk iACV. Unbiased and fair because it can be interpreted as fair value under
idealized market conditions. Generic because it neither requires specific risk
processes such as identification of loss events for bucket 3 or risk increase
events for bucket 2, nor does it require ad-hoc measures such as the 12-mon-
th expected loss provision in bucket 1. iACV provides a continuous quantifi-
cation of credit risk without cliff effects. It would have required an alignment
of risk and finance data systems, although at significant operational cost.
 10

By developing, proposing and discussing intermediate drafts before finalizing

the framework, the IASB tried to propose operationally simpler approaches
without getting overly conservative. Considering that the banking sector did
not yet fully recover from the most recent financial crisis, even a partly non-
-conservative approach was obviously no feasible option. The quantification
of the conservatism, caused by this iterative approach, will be discussed in
the following section and should be part of an efficient IFRS 9 reporting. Besi-
des the benefit of disclosing potential hidden reserves, it can provide the ba-
sis to differentiate between process impacts caused by local choices in imple-
menting the final standard e.g. how the identification of risk increase is hand-
led, and real portfolio developments.
Remark 1.1: The actual implementation of ED 2009 was rejected because of
operational effort and complexity. In the suggested analytical framework of
iACV however, an offline implementation on basis of risk and finance data
structures seems reasonable and justified.
The need to consider all reasonably available information especially cyclical,
forward looking predictions in producing the estimates will turn out to beco-
me the main analytical challenge. Credit risk does exhibit high volatility, which
makes the objective quantification and verification of cyclical effects difficult.
Traditional key risk indicators (KRIs) such as loan loss provisions or cost of risk
cannot easily be used for analytical purpose: they are observed mostly annu-
ally (i.e. resulting time series are too short for meaningful statistical analysis),
and may be distorted because of strong management attention on profit and
loss (P&L). On the other hand, economic predictions themselves are not very
reliable, especially concerning the proper timing and depth of an anticipated
crisis. Additionally the impact of any specific crisis may significantly differ by
industry and business segment.
The framework Impact of Risk, as introduced by Reitgruber (2013), provi-
des a high-frequent (monthly) objective measurement of credit risk. It allows
for statistically viable testing and quantification of historical crisis situations
with respect to their impact on credit risk for specific portfolio segments. Im-
plementation of these tests and the objective analysis of the quality of predic-
tions will be necessary to avoid overly cyclical loss estimates and to mitigate
the potential risk increase in the sector because of increasing earnings volati-
lity.
Finally, the question of provisions in the defaulted portfolio (bucket 3) is brie-
fly approached. The final standard states that already existing (i.e. regulatory)
parameters should be re-used as far as possible. Some changes must be ap-
plied to the Brazilian financial market, due to the fact that all local FIs are still
using standardized approach for credit risk, so they are not yet (at this date)
calculating LGD of their portfolios. Additionally, some adjustments must be
applied to local rules (specifically those of the Resoluo 2682/99).
The presented tools and methods will provide valuable insight during the imple-
 11

mentation phase of the final standard. After rollout these key risk indicators will
support the understanding of portfolio dynamics on an ongoing basis when used
in monitoring and reporting. Overall, the use of these measures for credit risk
portfolios before and after default will have a positive contribution to the general
understanding of credit risk processes and their efficiency.
This work is mostly based on the first two references written by Wolfgang Rei-
tgruber (2013, 2015) listed at its end. Carlos Nogueira as co-author integra-
ted content about Brazilian local rules (banco Central and CVM) as well about
practices and current stage of local implementation of the Basel Accord. Be-
sides, when writing these first two references, Wolfgang Reitgruber was dee-
ply inspired from Antifragility by Taleb (2012) and The Known, The Unkno-
wn, The Unknowable in Financial Risk Management by Diebold et al (2010).
Financial institutions will have to develop a better understanding of the sto-
chastic properties of day-to-day credit risk results. The supporting role of ca-
pital as cushion for small and large credit risk shocks is crucial to welcome
these events. They are important input to improve internal processes on ba-
sis of objective quality standards. The concept Impact of Risk and its ele-
ments Performing Loans (PL) Dashboard and non-performing loans (NPL)
Dashboard may provide a methodological approach to move credit risk from
the unknown or even unknowable at least one step closer to the known.

2. The Methodological Framework

Before starting a more detailed discussion on impairment under IFRS 9,
some preliminary remarks and assumptions are necessary: This entire paper co-
vers accounting of financial instruments under amortized cost. Financial instru-
ments can be reported this way, if the contractual cash flows consist primarily of
interest and principal payments and the business model aims at collecting the-
se cash flows.
The understanding of expected and unexpected loss: Although the final
standard for impairment and regulatory minimum capital requirements under
IRBA share similar concepts for credit risk (mostly on basis of parameters PD,
EAD and LGD) both pursue different objectives. Main focus of impairment ac-
counting is the expected loss, whereas regulatory standards in pillar 1 or 2 focus
on capital requirements to cover unexpected loss. The uncertainty (volatility) of
future cash flows, clearly relevant for fair value considerations, are irrelevant for
accounting under amortized cost.
Frequency and volatility of measurements: credit risk is typically reported
once a year in good quality
the operational effort to ensure daily updates with sufficient quality is high.
Reasonably long time series without structural breaks for quantitative valida-
tion or backtesting of portfolio models are difficult to find. Its high volatility
 12

due to its stochastic properties (rare, large failures with complex dependence
structures) makes an empirical analysis even more challenging.
Strategic objective: Management tends to use cost of risk in order to
achieve different strategic goals
smoothing the P&L, displaying financial health (Signaling) or execution of
big cleanup exercises, if budgets or market expectations cannot be achieved
anyway (Big Bath Accounting). An overview of the different managerial stra-
tegies can be found in Gaber (2013). In Domikowsky et al (2014) the situation in
Germany is empirically analyzed, where certain types of impairment are used
for tax optimization. Because of these distortions the empirical analysis based
on cost of risk is challenging.
The methodological link from provisioning to capital requirements under
the IRBA is represented by the shortfall, defined by the difference between the
expected loss and the provision amount. For capital requirements, this leads to
an effective replacement of the provision amount by a parameter-based assess-
ment of the expected credit risk (the expected loss). However, changes in capi-
tal requirements caused by the shortfall receive much lower management atten-
tion than changes to provisions. For P&L, relatively small changes already recei-
ve high attention. For capital however, the absolute magnitude is more relevant.
Significant large changes are mostly driven by external or regulatory factors.
Comparably small monthly changes, triggered by portfolio developments and
shortfall adjustments, tend to receive less attention. The underlying dynamic of
monthly capital requirements caused by expected loss changes is quantified in
the Impact of Risk methodology proposed by Reitgruber (2013). A detailed in-
troduction is provided in Appendix B of the first reference (see bibliographic re-
ferences at the end of this article).
Basically, the increase in provisioning levels, to be realized with the in-
troduction of the final standard caused primarily by the extension of the forecast
period to one year or lifetime, will be significant. These amounts will most like-
ly affect certain methodological decisions in the preparation phase. In the con-
text of the ongoing application however, other effects will prevail: By reducing
flexibility in the provisioning process, the volatility of monthly, quarterly or annu-
al actually reported risk costs will increase. There are already working papers fo-
cusing on increased volatility and timing of loss recognition under various provi-
sioning regimes, eg Grnberger (2012). Although this effect should not come to
a surprise for analysts, it may have unexpected consequences in the context of
disclosure and market perception. Deeper methodological understanding of the
volatility of credit risk will have to be developed in near future to provide reaso-
nable mitigation.
Currently P&L and capital requirements are seen as largely separate dis-
ciplines. The application of the final standard will lead to strong dependencies:
the increase in volatility will lead to a reduction of predictability of credit risk and
less possibilities to micro-control results. On the other hand, fluctuations will
 13

have to be compensated based on existing regulatory capital. The increased vo-

latility of results in a practically relevant 5 to 20-year observation period as found
in earnings at risk concepts represents a major challenge in the management of
financial institutions. Focus will shift from the 99.9x% events under gone con-
cern scenario used for economic and regulatory capital to the lower 80% to 95%
quantiles of the loss distribution for going concern analysis.

3. The Role of iACV as Economically

Justified Benchmark
For a discussion of lifetime risk concepts the following technical terms
need to be introduced:
Let GCAt be the gross carrying amount according to the final standard at
time t. It is calculated on basis of contractually agreed cash flows CFt, discoun-
ted by the applicable effective interest rate i. The net carrying amount (NCAt) is
derived from the GCAt by deduction of loan loss provisions. Provisions are calcu-
lated as the sum of expected losses Rt, discounted by the same discount rate i.
Let iACVt be the exposure value according to ED 2009 at time t, based
on expected cash flows CFt Rt and iED as applicable discount rate. The net car-
rying amount (NCAt) is derived from the GCAt by deduction of loan loss provi-
sions. Provisions are calculated as the sum of expected losses Rt, discounted by
the effective interest rate i.
The risk level r := i iED denotes the difference between the effective in-
terest rate according to the final standard and the effective interest rate accor-
ding to ED 2009. This definition of risk level corresponds to the common unders-
tanding of a risk margin or the so-called annualized (lifetime) loss. It is a mea-
sure of the average expected loss, given as a percentage of GCAt. The temporal
component of risk occurrence (e.g. for bullet loans where risk tends to materia-
lize later towards maturity or in fraud situations where risk tends to materiali-
ze early on) has apart from discounting effects no material influence on the
(overall) risk level.
The risk profile pt := Rt/(r GCAt) describes the temporal distribution of the
expected credit losses over the life of the loan, putting loss amounts in relation
to risk level r and GCAt. The neutral risk profile is characterized by flat 100%,
which means that losses of size r GCAt are expected at any time. This neutral risk
profile is conceptually similar to a situation with constant conditional forward
PDs (ie constant hazard rates).
The economic value of a financial asset is generally defined as the sum
of (expected) future cash flows, discounted at an interest rate to properly asses
the time value of money. The method suggested in ED 2009 fits this description:
Expected cash flows correspond to contractual cash flows net of expected cash
shortfalls = losses. The discount rate is implicitly defined to align the initial loan
 14

amount (payout) with discounted expected future cash flows. As a consequen-

ce, the resulting discount rate corresponds to the time value of money, net of risk
costs (expected loss).
Changes in the market situation besides changes to expected (lifetime)
losses shall have no effect on the valuation of a financial asset at amortized
cost. The underlying methodological assumption is the stability of market con-
ditions. This assumption has to cover the cost and funding structure (ie opera-
tional cost, expectations of risk level and volatility, profit expectations, etc), and
a flat yield curve to ensure stability of the applicable discount rate with decrea-
sing residual maturity.
The valuation method outlined in ED 2009 keeps the discount rate at loan
origination fixed over the entire life of the financial instrument in line with the
assumptions for a stable market environment as defined above. In the ongoing
calculation of iACVt, expected future cash flows are updated for new loss expec-
tations. Consequently, iACVt is the economically justified exposure value for all
t for stable market conditions but adjusted for changed (lifetime) loss expecta-
tions.
Ultimately, the final standard also emphasizes this fact: In the IASBs
view, expected credit losses are most faithfully represented by the proposals in the
2009 Impairment Exposure Draft.
Consequently, differences between iACVt and NCAt are not represen-
ting portfolio risk characteristics but quantify the effect of specific details in the
implementation of the final standard. Main drivers for these differences are the
processes and thresholds defining the transition between buckets 1, 2 and 3 and
certain conservative choices in the regulation such as the day-one provision of
12-month expected loss.
The key argument against the ED 2009 was finally the complexity of its
implementation. Finance and risk systems should have been operationally linked
and mutual dependency would be created. Cost-benefit considerations led to al-
ternative models which seem easier to implement, but with the tendency to lead
to more conservative exposure valuations.
Summarizing, iACV represents the appropriate methodological bench-
mark against which the calibration (or conservatism) of the local implementa-
tion of the final standards can be properly compared to. The discussion of por-
tfolio developments under IFRS 9 therefore can be split into two components:
the quantification of the difference between the NCAt based on the final stan-
dard and iACVt, and actual credit risk portfolio dynamics, to be observed on ba-
sis of iACVt.
 15

4. The Final Standard Compared to iACV:

The Case of Unchanged Risk Level
In contrast to the exposure value (iACV) as defined in ED 2009, the gross
carrying amount GCA in the final standard is not sensitive with respect to chan-
ges in risk level or even varying (but stable) risk profiles. It is based purely on
contractual details and considers initial risk expectations only through the ap-
plied market- based effective interest rate. At loan origination, by definition both
standards lead to identical exposure values iACV0 = GCA0. In case of neutral risk
profile and unchanged risk level this relationship holds true until end of maturi-
ty. The proof of this statement is straightforward and can be found - as well as
of others presented here - in the first reference in the bibliography list at the end
of this article.
Remark 4.1: This immediately leads to the interpretation of GCAt as the
sum of expected discounted cash flows with a loss expectation following the
neutral risk profile and iED applied as discount rate.
Unfortunately neutral risk profiles are not the typical case. The empiri-
cal analysis of credit risk frequently shows that default events tend to occur at
later stages, with a delay. Bullet loans are explicitly mentioned in the final stan-
dard, where low ongoing installments cause reduced default rates in the begin-
ning. Defaults are finally triggered by the bullet payment, leading to higher de-
fault rates towards end of maturity. A similar effect is plausible for other portfo-
lios as well, where artificially low default rates prevail in the first year (e.g. revol-
ving loans, long-term contracts).
Risks which are more relevant right after loan origination (e.g. fraud risk)
are generally controlled more efficiently in developed loan portfolios they could
provide some compensation in terms of loss distribution in the other direction.
For simplicity however, we will focus in the following discussion on the case of
delayed risk occurrence or detection.
An immediate consequence of this delay is that the GCA in the final
standard tends to become more aggressive than iACV. A delay of about one
year leads to a difference corresponding to the 12-month expected loss. Longer
delays may lead to even higher deviations. For a more detailed quantitative dis-
cussion please refer to Appendix A of the first reference in the bibliographic re-
ference list.
We note that this deviation already appears in case of unchanged risk le-
vel, and is attributable to the methodological definition of GCAt. By deducting
some provision amount in bucket 1 (ie the 12-month expected loss), a structurally
optimistic evaluation by NCAt in case of a delayed risk profile is avoided and a
certain conservatism already at loan origination is explicitly introduced.
A related discussion of the economic value compared to accounting va-
lue in this situation can already be found in Benston and Wall (2005). Although
the authors refer to US GAAP generally, their observations are equally valid for
current accounting regimes: GAAP values ignore anticipated changes in PD. Va-
 16

rying hazard rates (non-neutral risk profiles) effectively cause distortions of ac-
counting values over time.

Graphic 1: Example with different risk profiles and same risk level

Neutral and Delayed Risk Profile

3,00
2,50
2,00
1,50
1,00
0,50
0,00
1 2 3 4 5
Neutral Profile Delayed Profile Deviation

Figura 1 Exemplo com diferentes perfis de risco e um mesmo nvel de risco.

Figura 1 Exemplo com diferentes perfis de risco e um mesmo nvel de risco.
A figura 1 compara um perfil de risco neutro e outro tardio, aplicados a um emprstimo por
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0 t ) + (GCA
0 t GCA
0 0 0
0 t ) = EL0
0 t NCA
t1(r
t 0 0 rT )0GCA0Tt1 0
t = tiACVt NCAt = (iACVt GCAt ) + (GCAt NCA t ) = ELt 0 (r rT ) GCAT (Prova

no Apndice
(Prova no Apndice A de Reitgruber
A de Reitgruber (2015)).
(2015)). ComNCA
Com isso, isso,t se
NCA t se mantm
mantm conservador
conservador desdedesde que
Vt0 NCA0t , onde todos os valores
corresponde so anualizado
ao valor descontados da perda
taxa iED at ao
corresponde
esperada oaomomento
valor da da
longoanualizado
do prazo daoperao.
perda esperada
Esse ao longo do prazo d
conservadorismo causado pela estrutura da 17
norma definitiva sob cond
o (t=0). conservadorismo causado pela estrutura da norma definitiva sob condies de risco
estveis e perfil de risco neutro em qualquere perfilque
de risco
seja oneutro
caso. em qualquer que seja o caso.
Noneutro
o de um perfil de risco caso In
decom
umnvel
caseperfil geral
of ade riscoder,risco,
general No
risk profile,caso de um perfil geral de risco,

t = iACVt0 NCA0t = (iACVt0 GCA0t )+ EVt00tNCA

t =(GCA
0
) =(EV
NCAt0t =
0
ELt0t
GCA
0)
t1 + (GCA0t 0TNCA
0 t(r rT ) GCA
0) 0 t1
t = ELt 0 (r
(Prova
t = iACVt0noApndice
NCA0t = GCA0t NCA
A de Reitgruber
0
t = EL
(2015)).
0
Com
= r NCA
t isso,
0
GCAse
t mantm conservador desde que
(Prova no Apndice
t
A de Reitgruber (2015)). Com isso, NCAt se mantm
(Proof is given in Appendix A of Reitgruber (2015)). As a consequence,
t1 0 0
0 (rremains
rT ) GCA T ELtao . que t1(r 0 0
NCAt
onde ao valor anualizado da perda conservative
esperada as long
longo as da
do prazo rT ) GCA
0 operao. EsseT ELt .
adorismo causado pela estrutura da norma definitiva sob condies de risco estveis
0
de risco neutro em qualquerThe quefollowing
seja o caso.
A interpretao
interpretationa may seguirprove ser til: t1
pode useful: 0 (r rT ) GCAT corresponde
corres- ao descasamento
o de um perfil geral de risco, contbil cumulativo causado pela composio
ponds to the cumulative accounting mismatch caused by accruing credit-risk re- de receitas relacionadas
9 ao risco de crdito
9 0
lated revenues (asA part (como parte
interpretao da taxa efetiva
a seguir interest
of the effective de juros)
pode ser rate) de
t1
til: in acordo
0 line
com GCA
0 . As
rT ) GCAT .corresponde
(r with The
t despesas correspondentes
cor- ao descasamento
Vt0 NCA0t = (EVt0 responding
GCA0t ) + (GCA 0
expenses
t de
NCA
contbilcrdito
0)
= ELreal),
0
cumulativo
(actual
t contudo,
t1(r
causado
credit-risk),
t 0 rcostumam
)
pela
however,
T GCA 0 ser incorridas em exerccios contbeis diferentes. A
composio
are
T typically incurred in diffe- ao risco de crdito
de receitas relacionadas
norma
(como parte definitiva procura lidar com esse descasamento GCA0t(principalmente atravs da criao
rent accounting periods. The da taxastandard
final efetiva detries
juros)to de acordo
handle com
this accounting . As despesas
0 mis-
correspondentes (r
no Apndice A de Reitgruber (2015)). Com de um passivo
isso,
crdito NCA oculto)
t se
real), mantm introduzindo
contudo, conservador
costumam uma proviso
desde
ser incorridas inicial
em de ELt a partir
exerccios do primeiro
contbeis dia da
diferentes. A vi
match (mostly creating til doa hidden
contrato. liability) by introducing a baseline provision of
norma definitiva procura lidar com esse descasamento (principalmente atravs da criao d
1(r
rT ) GCA0T EL0t .starting with day one.
um passivo oculto) introduzindo uma proviso inicial de EL0t a partir do primeiro dia da vida
Remark 4.2: Whether
tilObservao
do contrato.the delay in the risk profile is caused by actual (as
4.2: No importa se o atraso do perfil de risco causado por comportamento
in bullet loans) or apparent (caused e.g. by poor internal processes for risk iden-
efetivos (como nos casos de emprstimos-balo) ou aparentes (ex: causados por deficin
tification) behavior, 9 is irrelevant. Significantly delayed risk recognition, even if
processos 4.2:
Observao internos destinados
No importa se o atraso
identificao
do perfildoderisco).
riscoReconhecimento do risco com atr
causado por comportamentos
just apparent and not real, maymesmo
significativo, lead toque non-conservatism
apenas aparente einno
theefetivo,
outlined pode static
levar a no-conservadorism
efetivos (como nos casos de emprstimos-balo) ou aparentes (ex: causados por deficincia
calibration test. teste deinternos
calibragem esttica conforme traado.
processos destinados identificao do risco). Reconhecimento do risco com atras
significativo, mesmo que apenas aparente e no efetivo, pode levar a no-conservadorismo
teste de calibragem esttica conforme traado.

5. The Final Standard Compared to iACV:

The Case5.of
Comparao entre a Norma Definitiva e o iACV: o Caso do Nvel de Risco Varivel
Variable Risk Level
As long as the risk level in relation to the original risk estimate does not
5. Supondo
Comparao que entre
o nvela de
Norma
risco Definitiva
em relaoe o estimativa
iACV: o Caso do de
original Nvel deno
risco Risco Varivel
aumente
significantly increase, the financial asset may remain in bucket 1. Consequently,
significativamente, o ativo financeiro pode permanecer no bucket 1. Consequentemente,
the 12-month expected perdaloss has to em
esperada be 12
recognized
meses as provision amount.
Supondo que o nvel de risco emprecisa
relaoser reconhecida
estimativa comode
original o montante da proviso.
risco no aumente
In the definition of this 12-month expected loss provision the final stan-
significativamente, o ativo financeiro pode permanecer no bucket 1. Consequentemente, a
dard assumes theperda regulatory
Na definio
esperada defi
emnition:
dessa 12-month
12proviso
meses contra expected
precisa perdas
ser credit losses
esperadas
reconhecida em 12
como oare the a norma
meses,
montante definitiva as
da proviso.
a formacredit
portion of lifetime expected da definio
losses thatregulatria:
represent as
theperdas de crdito
expected credit esperadas
losses thatem 12 meses so a parc
result from defaultNa das
events perdas de
on adessa
definio crdito
financial esperadas
contraao
instrument
proviso longo
that
perdas are da vida til
possible
esperadas da12exposio
within
em the 12a que
meses, normarepresentam as p
definitiva assu
de crdito
a forma da
months after the reporting esperadas
definio
date. resultantes
regulatria:
The IASB decided de descumprimentos
as not
perdas de crdito
to choose possveis
theesperadas
annualized dentro do prazo de 12
em 12 meses so a parcel me
expected loss, which contar
das perdas da
would de data de
becrdito
more in avaliao.
esperadas O
line withaothe IASB
longooptou
da vida
general por no utilizar a
til da exposio
methodological perda
un- esperada anualizada,
que representam as perd
estaria
deficrdito mais bem
esperadas alinhada
resultantes com o entendimento metodolgico dentro da
geral do norma definitiva.
derstanding of the nal standard. However, thedechosen
descumprimentos
definition possveis
is pragmatic prazo de 12 mese
definio
contar da escolhida,
data de contudo,
avaliao. O pragmtica
IASB optou e
por est
no fortemente
utilizar a relacionada
perda esperada ao conceito
anualizada, qu
and closely related to the regulatory
regulatrio concept of the shortfall.
de shortfall.
estaria mais bem alinhada com o entendimento metodolgico geral da norma definitiva. A
This specific choice of the initial provision amount is not methodologi-
definio escolhida, contudo, pragmtica e est fortemente relacionada ao conceito
cally justified. It serves primarily
regulatrio as a buffer to offset the non-conservatism in-
de shortfall.
troduced by delayed, Esta escolha especfica
non-neutral risk profi doles
montante
(as shown inicial
in da
theproviso
previous no tem justificativa metodolgic
section)
Serve principalmente como amortecedor para compensar
or to cover small increases in the risk level. It shall ensure that the final standard o no-conservadorismo introd
pelos perfis
Esta escolha in de risco
especfica tardios e
do montante no-neutros (como demonstrado na seo anterior), ou par
remains mostly conservative a practicable rangeinicial
of riskdalevels.
proviso no tem justificativa metodolgica.
cobrir
Serve pequenos aumentos
principalmente como do nvel de risco.
amortecedor Isso garanteo que a norma definitivaintroduz
perman
For a quantifi cation of the effect of an increasingpara riskcompensar no-conservadorismo
level, the concepts
predominantemente conservadora em uma gama praticvel de nveis
pelos perfis de risco tardios e no-neutros (como demonstrado na seo anterior), ou para de risco.
modified duration (Dmod) and Macaulay duration (DMac) of a financial instru-
cobrir pequenos aumentos do nvel de risco. Isso garante que a norma definitiva permane
ment will be introduced:Para uma quantificao do efeito em do nvel de risco ascendente, so introduzidos a seguir
predominantemente conservadora uma gama praticvel de nveis de risco.
conceitos de duration modificada (Dmod) e duration Macaulay (DMac) de um instrument
financeiro:
Para uma quantificao do efeito do nvel de risco ascendente, so introduzidos a seguir os
conceitos de duration modificada (Dmod) e duration Macaulay (DMac) de um instrumento
t t 0 0
 Para uma quantificao do efeito do nvel de risco ascendente, so introduzidos a seguir os
Para uma quantificao
conceitos dedo efeito do
duration nvel de risco
modificada ascendente,
(Dmod) soMacaulay
e duration introduzidos a seguir
(DMac) os instrumento
de um
conceitos de duration modificada (Dmod) e duration Macaulay (DMac) de um instrumento
financeiro: 18
financeiro:
Mac D t t CF /(1+i)t
t 0 t CF /(1+i)t GCA +GCA0 ++GCA0T +
D mod 1+i
DMac t CFt=
/(1+i)t t CFt
= t GCA
/(1+i)
t 0 +GCA= 1
0 ++GCA0 +
Dmod = (1+i) (1+i) t= CF
t /(1+i) (1+i) GCA0
= 1 (1+i) GCA0
T
1+i CF /(1+i) (1+i) GCA
t (1+i) GCA 0 0

GCA
onde
where GCAGCA0T = (1+i)TT.
onde GCA0T = (1+i)TT.

No
Nocaso
casodo No caso
doiACV
iACV dorespectiva
eeda
da iACV e da
respectiva respectiva
taxa
taxa de taxaide
dedesconto
desconto iED, , desconto iED,
No caso do iACV e da respectiva taxa de desconto iED,
ED

No caso In case
do iACV of
e da iACV and
respectiva the
taxa respective
dededesconto discount rate iED,
No caso do iACV e da respectiva taxa iED, ,
descontoiED 10
iACV
iACV ++iACV 00
1000+
iACV
iACV ++
0 iACV 0 00
++iACV + +++
iACV iACV00 +
1 TT + iACV T+ + iACV 0 +
DDiACV
iACV
mod = = DiACV
iACV + = 0011+ iACV
iACV +
iACV
iACV 0 0
0 1 T
mod
iACV
mod
iACV
0 0 + iACV
(1
(1+1 iD
1+ +
i )
mod) +=iACV
(1
iACV
0
T+
+00iED
iACV T )+iACV

Dmod
Dmod==
iACV EDED (1 + iED ) iACV0
(1 iED))iACV
(1++iED iACV00
AAduration A durationpode
durationmodificada
modificada modificada
pode ser pode ser como
serinterpretada
interpretada interpretada
comosemielasticidade como semielasticidade
semielasticidade (ex.:
(ex.:Schwaiger,
Schwaiger, (ex.: Schwaiger, 2014),
2014),
2014),
relacionando A duration
a variao modificada
relativa do valor pode
presenteser interpretada
GCA ou como
iACVabsoluta semielasticidade
absoluta(ex.: Schwaige
A relacionando
relacionando
A duration
duration The
modificadamodifi
aavariao
variao
modificada ed
pode duration
relativa
relativa
pode ser ser do can
dovalor
valor
interpretada
interpretada be interpreted
presente
presente
como
como GCA
GCA as
00ou semi-elasticity
ou iACV
semielasticidade
semielasticidade iACV variao
00(ex.:0variao
(ex.: (e.g.
Schwaiger,
Schwaiger, 0 2014),
variao
Schwai-
absoluta 2014),da
dataxa
taxa da taxa
relacionando a variao relativa do valor presente GCA0 ou iACV0 variao abso
de desconto
deger,
desconto
relacionando dea desconto
2014),aaplicada
relacionando aplicada
relating
variao the iaplicada
i irelativa
variao ou . .Um
ourelativa dodo
Um
irelative ivalor
oude
nvel
nvel ide
change
valor .risco
Um in nvel
EDpresente
risco
presente GCAde00ou
crescente
crescente
present
GCA risco
ou (com
value crescente
iACV
(com variao or(com
variao
00variao
GCA variao
absoluta
absoluta
absoluta
iACV tor), absoluta
que
dada
the
r), taxa
que
ab- temr), que tem
tem
iED.iACV variao absoluta taxa
EDED
de desconto o mesmo
aplicada iimpacto
ou i .
de
Um
desconto
sobre
nvel o valor
de
aplicada
risco presente
crescente
i ouque
(com
Um
um nvel
aumento
variao
0
de risco crescente
0
correspondente
absoluta r), que
(com
temda variao
taxa de absoluta
deoodesconto
mesmo impacto
mesmochange
solute impacto
aplicadain sobre
theioEDo
sobre
i ou valor
. valor
applied presente
presente
Umo nvel
ED
mesmo
discount que
que
de impacto
risco um
umaumento
rate i aumento
crescente
sobre o
. An
or iED(com correspondente
valor
correspondente
increasing
variao
presente que
da
risk
absoluta dataxa
um
taxade
level
r), de
(with
que
aumento tem
correspondente da tax
o mesmo
o desconto,
desconto,
mesmo impacto
leva
leva
impacto
absolute aauma
change umasobre
desconto,
sobre r),oleva
reduo o
reduo
valorvalor
which a uma presente
relativa
presente
has reduo
relativa de
de
thequeque
Dsame
DiACVum
relativa
um
iACVmod aumento
de DiACV
sobre
sobre
aumento
impact
mod
correspondente
iACV
iACV
on 00no
the
mod sobre
no
correspondente valor
valor
present iACV
dededa
r
0r
da taxa
no
valueD valor
DiACV
taxa de
iACV
asde
modade
mod r DiACVmod. Essa
. .cor-
Essa
Essa
desconto, leva a uma reduo desconto,
relativa de leva
D iACVamod
umasobrereduo
iACV relativa
no valordo de
de D
r
iACV
DDaomod sobre . Essa iACV no valor
ao0 longo da de r DiACV
duration aduration
modificada podemodificada
ofrepresentar pode umrepresentar
papel um
crucial papel
no crucial
contexto no contexto
EAD longodo EAD
da vida vida
iACV
duration
desconto,
responding modificada
leva uma
increasepode
reduo representar
relativa
the discountde um
D iACVpapel
rate, crucial
sobre
modleads no
iACV
to a D0contexto
no
0 iACV
valor do
de EAD
r
(relative) ao
iACV longo
mod
mod. Essa
decrease daofvida
duration modificada pode durationum
representar modificada
papel pode
crucial norepresentar
contexto do umEADpapelao longo crucial no contexto do EAD ao lon
da vida
da operao,
daiACV
operao,
duration modificada da
temaoperao,
tema que
que
pode est
est tema
alm
alm
representar que
do est
escopo
doedescopo
um alm
papel do
deste
deste escopo
crucialartigo.
artigo. deste mod artigo.
by
da operao,
0
r D iACV
tema mod . This
que est alm modifi
da operao, duration
do escopo tema deste quemay
artigo.est alm do escopo deste artigo.vida
no
playcontexto
a crucial do EAD
role ao
in longo
the da
context
da operao,
of lifetimetema EAD, quewhich
est alm is out doofescopo
scopedeste of thisartigo.
work.
Com
Combase
basenessaCom
nessa base
of nessa
relao,
relao, relao,
ooteste
teste de o teste
decalibragemthede
calibragem calibragem
esttica
estticada esttica
daseo
seo da from
anterior
anteriorseo
para
para anterior
nveis
nveis para nveis variveis
variveis
variveis
Com baseOn basis
nessa this
relao, relationship,
Com
o teste de base nessa
calibragem static
relao,
esttica calibration
ode
da teste
seo de test
calibragem
anterior last section
esttica
para nveis da seo
variveis anterior para nve
de
de
Comtorisco,
risco,
base pode
pode
nessa de risco,
ser
ser pode
generalizadoser
generalizado
relao, o teste generalizado
para
depara perfis
perfis
calibragemde para
derisco perfis
risco
esttica risco
no-neutros
no-neutros
da seoparaeno-neutros
e variaes
variaes doe
do variaes
nvel
nvelde
de do nvel
risco,
risco, de risco,
de variable
risco, poderisk
serlevels can de
generalizado be generalized
para perfis
risco, podedeser for
risco non-neutral
no-neutros
generalizado eanterior
risk
variaes para
profi
perfis de nveis
doles and
nvel
risco devariveis
chan-
risco,
no-neutros e variaes do nve
dena
naforma como nasegue:
forma como segue:perfis de risco no-neutros e variaes do nvel de risco,
naforma
risco,
ging pode
forma
riskcomo
ser
como
levelsegue:
generalizado
as follows: para
segue: na forma como segue:
na forma como segue:
0
tt== iACVt0t0(nvel
iACV
t = iACV
t = iACV
0(nvel de t (nvel
derisco,
risco,
t (nvel de risco,
de de
perfil
perfil
perfil risco,
de perfil
risco)
derisco)
risco) NCA

0 (nvel de
NCA
NCA 00t=
0
risco)
t== NCA0t =
t = iACV t de risco,
t perfil de risco) NCA0t =
t = iACVt000(nvel de risco,
0 perfil de risco) NCA 0
= 0
t (nvel t (nvel
= (iACV de de
risco, perfil de t000(nvel
risco) original,
iACV original,
tt(nvel 0 perfil de risco)) +
===(iACV 0(nvel de (nvel
(iACV
(iACV t (nvel dederisco,
risco, perfil
perfil
perfil derisco)
de risco)
risco) iACV

0 (nvel iACV
iACV t(nvel
t original,
original, perfil
perfil
perfil de
derisco))
deiACV + ++
risco))
risco))
= (iACVt de risco, perfil de risco) t (nvel original, perfil de
t
0 (nvel 0 (nvel
= (iACVt 000 (iACV de risco, 0 perfil de risco) iACV0t00 original,
0 perfil de risco)) +
+++ (iACV
(iACV
(iACV + original,
tt(nvel
t(nvel
(nvel t (nvel
original,
original, original,
perfil
perfil
perfil de
derisco)
de perfil
risco)
risco)
0 (nvel de
NCA
NCA
NCArisco)
t t)t))=== NCAt ) =
+ (iACV t original, perfil de risco) NCA0t ) =
+ (iACVt0 (nvelt1t1
t1 original, t1 perfil de risco) NCA 0)
t =
t1
=== ELEL0
EL0
tt
0t1
t(r(r
(r = EL
0
rtrTr)))GCA
TT (r
GCA 00
0
GCATTT r
rr )0D
Tr GCA
D iACV
iACV
iACV
Dmod,t
mod,t
0
T rtttDiACV
GCA
GCA
GCA
000
mod,t GCA
0
t
= EL t mod,t
(r rT ) GCA 0
T r DiACV
mod,t GCAt
0
= EL0t (r 000 rT ) GCA 0 0T r DiACV mod,t GCA 0
t
0
0
iACV
Onde
Onde D
DDiACV
iACV
aaaduration
Onde duration
DiACV modificada
athe
durationmedida no
notempo
modificada t.t.t. no tempo
medida t.
Onde Where
mod,t mod,t modificada
duration modificada
is medida
medida
modifi no tempo
tempo
ed duration measured at time t.
mod,t
mod,t
iACV Onde DiACV
mod,t a duration modificada medida no tempo t.
Onde Dmod,t
a duration modificada medida no tempo t.
Consequentemente, permanececonservador
Consequentemente, permanece ( 0) se, e somente
conservador 0)se,
( only
se,
Consequentemente,
Consequentemente, t ttpermanece
Consequently, permanece conservador
tconservador
t remains (
(0)
conservative se,
se,eifesomente
0)(0) somente
and ife somente se,
se,
se,
Consequentemente, t permanece conservador ( 0) se, e somente se,
Consequentemente,
0 t1 t permanece 0 conservador ( 0) se, e somente se,
EL (rr ) GCA
r EL 0 TT.(rrT ) GCA
t t10 T
0 t1
00T 0
EL0t0t
0t1 EL
(rrTTt))
(rr GCA
0GCA
r
r r
Dmod,t0iACV
0 .r
GCA00t iACV . GCA ELt . t1 0 T 0
0 (rrT ) GCA T
EL0t Dt1
DiACV
iACV
(rr )
GCA
GCAGCAD 0
.
r mod,t T tt mod,t
0mod,t
iACV 0
T
. t
DiACV
mod,t GCAt
0
Dmod,tpouco
Se permanecer GCAt conservadorismo aps o realizar o ajuste para a distribuio temporal
Se permanecer
Sedopermanecer Sepouco
risco (pequenospermanecer
pouco
If little pouco
conservadorismo
conservadorismo
conservatism
valores conservadorismo
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No conservadorismo
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no
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da norma
as perdas de um aumento
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esperadas de do risco, a quantificao
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conservadorismo
bucket 2, aps aimplcito
implcitode
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direta:
um as
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originalmente
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provises que cubram conservadorismo
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 19

In bucket 2, after detection of a significant risk increase, the quantifica-

tion of the implicit conservatism is straightforward: the originally expected los-
ses (based on neutral risk profile) are implicitly reflected in the GCA of the final
standard. The requirement of provisions covering (updated, actual) lifetime ex-
pected losses consequently causes double the counting of originally considered
lifetime losses in NCA.
The main process responsible for the actual size of conservatism is the
timing of transition to bucket 2. If the applied thresholds are very low, overly sen-
sitive to small or temporary changes and the bucket change is triggered too ear-
ly, the conservatism in bucket 2 could reach significant amounts. If risk incre-
ases are detected too late, however, the ongoing assessment in bucket 1 may
become non-conservative as seen in the beginning of this section. An overly
conservative implementation of this transition process may in the worst case
even question the adequacy of the final standard in the sense of a best possi-
ble representation of the financial asset.
The following example shall make this statement more intuitive: if a rela-
tive increase in risk level by 25% (a PD change from 2% to 2.5%) is already trig-
gering transition to bucket 2, the relationship between conservatism and booked
provision becomes 1:1.25. I.e. an amount of the size of 80% of the booked provi-
sion might constitute a potential hidden reserve. Even if the threshold for risk in-
crease is set to a very high level of 500% (PD from 2% to 10%), the potential hid-
den reserve would still amount to 20% of the booked provisions.
This conservatism in bucket 2 should ideally be balanced with an opposi-
te effect in bucket 1: An increase of the risk level by 25% as in the previous exam-
ple with a modified duration of 4 years would already be sufficient to offset the
provision of 12-month expected loss (4x25% = 100% in terms of risk level). Reaso-
nable timing of the transition to bucket 2 is critical to avoid an overly pessimistic
creation of excessive hidden reserves in bucket 2.
For the practical implementation of this threshold, the final standard gi-
ves little practical advice: At each reporting date, an entity shall assess whether the
credit risk on a financial instrument has increased significantly since initial recogni-
tion. When making the assessment, an entity shall use the change in the risk of a de-
fault occurring over the expected life of the financial instrument instead of the chan-
ge in the amount of expected credit losses. To make that assessment, an entity shall
compare the risk of a default occurring on the financial instrument as at the reporting
date with the risk of a default occurring on the financial instrument as at the date of
initial recognition and consider reasonable and supportable information, that is avai-
lable without undue cost or effort, that is indicative of significant increases in credit
risk since initial recognition.
This definition is methodologically consistent with the final standard by
effectively relating the change to bucket 2 to changes in risk level and profile (li-
fetime loss expectations). The required significance of the change (i.e. the defi-
ned threshold) and the adequacy of the resulting potential hidden reserve are,
however, are not addressed at all.
 20

Alternatively, the IASB refers to the 1-year regulatory PD in triggering

the transition: However, the IASB observed that changes in the risk of a default oc-
curring within the next 12 months generally should be a reasonable approximation of
changes in the risk of a default occurring over the remaining life of a financial instru-
ment and thus would not be inconsistent with the requirements. This note may be
particularly counterproductive in case of behavior scorings with a high level of
month-to-month variability, where it could cause significant conservatism and
P&L volatility in bucket 2.
The rebuttable presumption, which qualifies a 30-day past due event as
evidence of a significant increase in risk level, may cause significant conser-
vatism in bucket 2 as well. Alternative fast responding but transient early war-
ning indicators, should be considered with caution for this very reason. Clear fo-
cus needs to be the statistical significance of any trigger pure volatility is to
be avoided while significant risk indicators have to be taken into account as ear-
ly as possible.
Summarizing, a quantification of the implicit conservatism (potential hi-
dden reserve) introduced by the final standard in buckets 1 and 2 was proposed.
An ongoing monitoring of this deviation from the economically justified bench-
mark (defined in the ED 2009) is required for a successful implementation of IFRS
9. It highlights overly optimistic or pessimistic evaluations and should improve or
ensure comparability of financial assets between entities. Increasing earnings
volatility, especially if left unexplained, could otherwise have unintended negati-
ve consequences for the financial sector and may even increase structural risks.

6. Consideration of Forecasts in
Expected Loss Estimation
One of the major differences between regulatory and accounting stan-
dards is the objective of the loss estimates. Regulators generally demand loss
estimates to match long-term default rates and expect certain conservatism.
Specifically we find minimum time series requirements in the current regula-
tion and reference to a through-the-cycle approach, which is methodologically
close to an unconditional loss expectation. Conservatism is included by defini-
tion of minimum thresholds, eligibility criteria or it is explicitly requested throu-
gh add-ons in case of unreliable or unrepresentative data. This understanding
was most recently re-enforced by the consultation paper EBA (2014b), article 49.
The focus of standard setters is the economically unbiased estimate and
a fair and objective exposure value on basis of (reasonably) available information
at the time (forward looking,point-in- time conditional loss estimates).
In this sense, regulators try to achieve stability of the minimum capital
requirements while requesting conservatism in case of uncertainty. The gene-
ral tendency of rating systems to show cyclical behavior is considered with cau-
 21

tion. In accounting standards, however, the current best prediction (with reaso-
nable effort) has to be taken into account. As immediate consequence, cyclical
market sentiments shall directly impact the balance sheet. This effect is stron-
gest in fair value accounting, but also to be expected when measuring at amor-
tized cost through forward looking loss estimates. Although the final standard
does not specify in detail how to execute this requirement, it is clear that inter-
nal and external factors have to be considered when deriving these estimates.
As internal factors we understand changes to risk-related processes,
which may have a sustainable and significant effect on the overall risk level or
the temporal distribution of losses. These impacts can be considered in form of
an adjustment to the loss estimates. Relevant process measures must be defi-
ned and monitored to reconfirm these adjustments on an ongoing basis. There
may be good arguments for risk improvements (such as improved credit rating
systems, higher collateral requirements, strengthened underwriting to reduce
high-risk customer segments, etc.), but also potential risk increases after long
periods of low losses have to be considered. As an example, significant above-
-average growth in an otherwise stable segment might indicate potential yet hi-
dden risk increase.
External factors are found predominantly in the area of macro economic
developments and tend to be cyclical. Regulatory standards in IRBA segments
clearly focus on long term averages to provide a stable baseline (e.g. as stressed
by EBA 2014b). Accounting standards diverge from the regulatory view: cycli-
cal developments must not be averaged but have to be considered when deri-
ving loss estimates. The challenge will be how to separate overly optimistic or
pessimistic market sentiment from the real underlying significance of predic-
tions. Additionally, accounting standards require probability weighted estima-
tes. Overly cyclical point-in-time estimates seem inconsistent with this approa-
ch, whereas Bayesian type modelling may better fit the picture. The (small but
reasonable) likelihood of a crisis situation needs to be appropriately included in
the estimates even in case of great economic outlook .
With respect to credit risk we are primarily concerned regarding timing
(forecast horizon) and depth (quantity of losses) of these forecasts. An interes-
ting analysis on basis of the 2008/2009 crisis can be found in Ivantsov (2013). On
basis of this crisis he demonstrated that even shortly before the default of Leh-
man Brothers the depth of the subsequent economic impact was seriously unde-
restimated. Although an economic downturn was already expected, its systemic
impact, however, was ultimately not recognized. As a matter of fact, economic
forecasts seem to be only reliable with respect to relatively short-term trend in-
dications (a few quarters), but fail seriously with respect to forecasting the dep-
th of upcoming extreme events.
This uncertainty has to be considered appropriately when implemen-
ting IFRS 9 impairment standards. An uncritical adoption of long-term forecasts
would almost certainly cause excessive cyclicality and thus may well increase
 22

the likelihood of credit bubbles and subsequent losses in case the economy fi-
nally turns. Thus, the volatility caused by the predictive aspect in risk estimates
needs to be carefully controlled.
For easier understanding of this effect let us take the following nave
example: In a typical portfolio with annual risk cost of 100 million euros (long-
-term average, regulatory point of view), only 50 million euro were realized annu-
ally in the past two years due to positive economic developments. This may ea-
sily be in line with a general economic capital model, where mode and median
(to be considered typical annual results) are significantly below the mean of the
loss distribution (corresponding to the expected loss). The general economic fo-
recasts continue to expect positive development. However, we know on basis of
not too long history that realized risk costs amounted to around 500 million euro
in recent crisis situations. The loss estimate (which according to IFRS 9 has to
be based on probability-weighted outcomes) must take into account that such
an event will realize with a probability of 5-20%. Thus the fair estimate, even after
taking into account the actual positive economic outlook, is closer to 95 million
euros (= 50 million * 90% + 500 million * 10%) and may be virtually identical to the
long-term regulatory estimate.
Statistical verification of these cyclical factors and economic predictions
in credit risk through backtesting poses the next analytical challenge: risk costs
generally have to serve a variety of managerial objectives, as already mentioned
in Section 2.
To objectively test the validity of economic forecasts, undistorted and
frequently (quarterly or monthly) available estimates of realized credit risk are
necessary. One measurement to satisfy these requirements was derived in Reit-
gruber (2013), through Impact of Risk (IoR). A short introduction can be found
in appendix B of the first reference in the bibliographic reference list. The appli-
cation of this framework allows for a high frequent measurement of credit risk,
which is largely uninfluenced by manual processes. In contrast to the classical
credit risk measurement via direct write-offs or impairment changes, the timing
of risk realization is largely established by the regulatory definition of default and
the LGD parameter. It was proven that for a complete portfolio cycle, from gene-
ration to liquidation, the aggregated Impact of Risk measure is identical (except
for possible time value effects) to traditional cost of risk.
To verify the effect of external (or internal) factors on credit risk, the PL
Dashboard from the Impact of Risk framework will be primarily used. In this
measure, realized credit risk is identified through the regulatory definition of de-
fault and quantified by EAD times LGD. The regulatory definition of default is
largely standardized by definition of specific risk signals and the 90-day (or 180-
day in case) past due threshold. Consequently, we can assume a fairly homo-
genous application across different portfolios and even across financial institu-
tions. Another recent consultation paper by EBA (2014a) is attempting to further
align and strengthen the default definition although this is going to cause in-
 23

consistencies in the default time series right after implementation, it will ultima-
tely support an even more objective application of Impact of Risk.
Remark 6.1: For the application of the PL Dashboard the accuracy of the
EAD and LGD estimates is less critical than the default definition: the product
EAD x LGD is practically applied only as a weighting function in a classical ba-
cktest of default rates. The validation of the LGD model itself is performed throu-
gh a separate NPL Dashboard and the EAD model is validated BOP
through the an-
EOP
PL Dashboard = EL
nual version of the PL Dashboard + wo
as outlined below EL
with PL . ou
EAD
In case of an annual observation period the PL Dashboard can be des-
EL EOP
cribed as: = ELBOP
PL wo + PL Dashboard.
BOP
PL Dashboard = ELEOP + wo ELPL ou
EOP BOP
PL Dashboard
Para separar os impactos = de PD,ELEOPEAD a+
e LGD,
wo
verso dividida ELBOP
deriva-se
ou
assim:
PL
EOP PL DashboardBOP = EL + wo EL PL ou
EL = ELPL wo + PL Dashboard.
EOP BOP
ELEOP
= ELBOP PL wo + PL Dashboard.
EL = ELPL wo +BOPPL Dashboard.
PL Dashboard = (EAD BOP
Para separar os impactos de PD, EAD e LGD, a verso dividida deriva-se assim:
LGD PL ) ELBOPPL +
Para separar os impactos de PD, EAD e LGD, a verso dividida deriva-se assim:
+Toseparar
Para separate impactsde
os impactos
(EAD
from PD,
PD,LGD
DEF eEAD
EADDEFLGD,and LGD
a verso
PL EAD
BOPthe split
LGDBOP
dividida versionassim:
deriva-se
PL ) +
is derived
as follows:
PL Dashboard = (EADBOP LGDBOP PL ) ELPL +
BOP
EOP EOP BOP DEFBOP DEF BOP
(EAD
PL+Dashboard = LGD (EAD
NPL BOP
EAD LGDBOPLGD EL
PL ) PL
) BOP
PL +
PL Dashboard = (EAD LGD PL ) EL PL +
+ (EADDEF LGDDEF PL EAD
BOP
LGDBOPPL ) +
DEF DEF BOP BOP
+ o
BOP e EOP representam comeo (EAD e oDEFfim doLGD PL
perodo
DEF de EAD BOP LGD
observao e DEF ) +o momento
PLindica
BOP
do default. +
Emprstimos (EAD
inadimplentes

EOP LGD
EOPso diferenciados
PLDEF EAD
com base
DEF LGD
em PL ) +
estarem ou no
+ (EAD LGDNPL EAD LGDPL )
inadimplentes no comeo do perodo de EOPobservao
EOP(antigos NPL
DEF ou novos
DEF NPL).
+ (EADEOP LGDEOP
NPL EADDEF LGDDEF PL )
+ (EAD LGDNPL EAD LGDPL )
BOP e EOP representam
O primeiro termo o comeo e o fim do perodo de observao e DEF indica o momento
do default. Emprstimos inadimplentes
BOP e EOP representam so diferenciados
o comeo e o fim do com basedeem
perodo estarem ou
observao no indica o momento
e DEF
inadimplentesBOP
dono e EOP
comeo
default.
BOP representam
do perodo
Emprstimos
and EOP o comeo e
de observao
inadimplentes
represent o fim do
so
the beginning perodo
(antigos NPL de
diferenciados
and end observao
oucom
novos
of the e DEF
NPL).
base indica
em estarem
observation o momento
ou
pe- no
do default. Emprstimos
inadimplentes no comeo inadimplentes
do perodo de so diferenciados
observao com NPL
(antigos base em
ou estaremNPL).
novos ou no
riod and DEF denotes the time of default. Non-performing loans are differentia-
inadimplentes no comeo do perodo de observao (antigos NPL ou novos NPL).
O primeiro
ted termo
whether they were non-performing at the beginning of the observation pe-
BOP BOP BOP
O primeiro
riod (old
NPL)termo
PDnot (new NPL).
or (EAD LGD PL ) EL PL
O primeiro termo novos defaults
The first term

Corresponde ao retroteste de PD tradicional,

BOP baseadoBOP
em impacto,BOP
com as ponderaes
PD (EAD LGDPL ) ELPL
EADBOP * LGDBOPPL
PDdefaults
novos (EADBOP LGDBOP BOP
PL ) ELBOP
PL
PD (EADBOP LGDBOP
PL ) EL PL
novos defaults
Corresponds to the traditional impact based PD backtest with weights
O termo central novos defaults
CorrespondeBOP
ao retroteste
BOP de PD tradicional, baseado em impacto, com as ponderaes
EAD * LGD PL
EADBOP * LGDCorresponde
BOP
The middle
PL ao term
retroteste de PD tradicional, baseado em impacto, com as ponderaes
Corresponde ao retroteste de PD tradicional, baseado em impacto, com as ponderaes
EADBOP
BOP
* LGDBOP
BOP
PL
EAD * LGD PL
O termo central
EAD
O termo
central (EADDEF LGDDEF PL EAD
BOP
LGDBOP
PL )
O termo centralnovos defaults

descreve um retroteste de EAD com ponderao LGDBOPPL corrigida por retomadas de garantias
EAD
reais alteraes
e outras da LGD (EAD DEF
LGDDEF
imediatamente antesdo
PL EAD BOP
default. ALGD
BOP
LGDDEF )
PLPL precisa ser
 haja umahaja uma diferena
diferena metodolgica
metodolgica em ao
em relao relao ao da
clculo clculo da LGD
LGD para para emprstimos
emprstimos
inadimplentes.
inadimplentes. 24
haja uma diferena metodolgica em relao ao clculo da LGD para emprstimos
O termoO termo final
final
inadimplentes.
describes an EAD backtest with weights LGDBOPPL corrected for collate-
ral repossessions and other LGD changes immediately before default. LGDDEFPL
Ohas
termo final
to be in line with the LGD method for performing loans, in case there is a me-
thodological difference to the LGD method for non-performing loans.
EOP EOP DEF DEF DEF
last
The LGD
term (EADEOP(EADLGDEOP LGD EAD EAD
NPL LGDDEF LGD
) PL )
LGD NPL PL
novos defaults
novos defaults EOP
LGD EOP
(EAD LGD
DEF NPL
EADDEF LGDDEF
PL )EOP
comparacompara o LGD imediatamente
o LGD imediatamente
novos defaults antes (LGD antes
DEF (LGD PL) e imediatamente aps
PL) e imediatamente aps (LGD
EOP (LGD NPL) o default e
NPL) o default e
deve, em geral, ser um pequeno termo de correo ou erro.
deve, em geral, ser um pequeno termo de correo ou erro. Um grande desvio pode indicar Um grande desvio podeaindicar a
descontinuidade
descontinuidade do LGD
mtodo do mtodo
deantes de
LGD (LGD LGD
logobefore
aps logo aps a ocorrncia
a imediatamente
ocorrncia do default, ou pode at destacar
compara ocompares
LGD imediatamente immediately DEF
PL) e (LGD DEF
) do
and default,
aps ou
after(LGD
(LGDpode
EOPEOP at destacar
NPL) o )default
de- e
uma em uma estimativa
estimativa incorreta incorreta
da taxa da cura
taxa de cura precoce PLda LGD. NPL
deve,
fault andgeral, ser
should um pequeno
generally adesmall
betermo precoce
de correo
correction da
ouLGD.
erro.
or Umterm.
error grande A desvio pode indicar a
large deviation
descontinuidade do mtodo deofLGD
may indicate discontinuity thelogo
LGD aps a ocorrncia
method do default,
right around andou pode
after at destacar
default, or
uma estimativa
As incorreta
medidas de da taxa
risco de de curaem
crdito, precoce
sua da LGD.se baseiam em taxas anuais de default. No
maioria,
As medidas
may de risco de
even highlight ancrdito,
incorrectem sua maioria,
estimate of se
thebaseiam
early cureem taxas anuais
rate in LGD.de default. No
caso de caso
uma de uma carteira
carteira
Measurements
suficientemente estvel,
suficientemente
of credit riskestvel,
are mostlycontudo, contudo,
based PDson PDs mensais
mensais
annualoudefault
ou trimestrais
trimestrais
rates. podem
In ser
podem ser
derivadas derivadas proporcionalmente (pro-rata) aos valores anuais. Adotada essa premissa, o PL
As medidas
case a proporcionalmente
de risco
of Dashboard
suffi de crdito,
ciently
pode stable
ser
(pro-rata)
em
portfolio
descrito como
aos
sua maioria, valores
however,
segue:
anuais.em
se baseiam
monthly Adotada
ortaxas essa premissa,
anuais
quarterly canobe
de default.
PDs PL
No
Dashboard
caso de uma
derived by pode sersuficientemente
carteira descritoannual
down-scaling como segue:estvel,Under
values. contudo, thisPDs mensais ou the
assumption, trimestrais podem ser
PL Dashbo-
derivadas proporcionalmente (pro-rata) aos valores anuais. Adotada essa premissa, o PL
ard can be described as follows:
Dashboard pode ser descrito como segue:

PL Dashboard
PL Dashboard = ELEOP
M EOP + wo ELBOP ELBOP
PLou/12 ou
M = EL +

wo
PL /12
EOP BOP
PL
ELDashboard
EOP ELEOP
= M
EL=BOP

ELEL
= /12
BOP


PL /12
wo
+ wo wo+
PL



+ EL /12 .ou M.
PLPLDashboard
Dashboard
PL M
BOP
ELEOP
AMain
= EL
principal PL /12
vantagem
advantage
umwo
of de perodo

a shorter de + PL Dashboard
observao

observation mais
period is breve M .cant
uma
a signifi reduo
reduc-significativa do
A principal vantagem de um perodo de observao mais breve uma reduo significativa do
tion
desvio desvio
of causado
the causado
deviation
por EAD por
caused EADbyem
ou LGD ouEAD LGD em
EADor e
LGDEADine LGD
LGD. Assim,
. and
Assim, as. verses
LGD Therefore,mensais ou trimestrais
the mon- do PL do PL
EADas verses mensais ou trimestrais
Dashboard
Athly
principalDashboard
vantagem
or quarterly podem
podemversions
ser ser
desuficientes
um perodosuficientes
of thepara para
de Dashboard
PL observao uma
uma anlisemais anlise
mais mais
detida
maybreve
well be detida
dos
uma dos
efeitos
suffi efeitos
cientcclicos,
reduo cclicos,
em do
significativa
for further em
contraste contraste
com com
ocyclical o
, mais , mais
preciso. preciso.
Caso Caso essa aproximao revele-se inadequada do PL a carteira
para
desvio causado thepor PD
EAD oueffects,
LGD EAD eessa
eminstead ofaproximao
.the
Assim, revele-se
as exact
verses inadequada
mensais ou this para
trimestrais a carteira
PD
analysis of LGD more PD , Should appro-
Dashboard empodem
em anlise, anlise,serser
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e ajuda e ajuda a
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com defaults
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This property da
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puramente aleatrios.
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17 17
 25

During calm economic periods the correlation of defaults (asset correla-

tion) is expected to be low. Consequently, the null hypothesis of the nave por-
tfolio model can be used to test for asset correlations. With monthly data points
available over a period of 5 to 10 years, a common crisis scenario (in the range
of the 80% -95% quantile) can be effectively tested. The suggested framework
provides a starting point for further empirical analyses on actual credit portfo-
lios and may be used to justify (or reject) cycle adjustments for IFRS 9 impair-
ment accounting.

7. Thoughts on LGD (or EL for those in Standardized

Approach) in Bucket 3 and an Alternative Backtesting Ap-
proach
For defaulted exposures in bucket 3 there are obvious methodological di-
fferences between the final standard and the regulatory requirements on LGD
estimation. Appendix A of the final standard defines the amount of credit risk as
follows: The difference between all contractual cash flows that are due to an entity
in accordance with the contract and all the cash flows that the entity expects to recei-
ve (i.e. all cash shortfalls), discounted at the original effective interest rate.
Regulatory LGD estimates follow a different approach: the applicable
discount rate may vary in a large range from risk free rates to effective interest
rates. High attention is given to the cost structure after default, conservatism as-
sumptions and corrections for downturn situations (Downturn LGD).
A benchmark analysis performed by EBA (2013) confirms the large ban-
dwidth of actually applied discount rates: The discount rates vary from below 2.5%
to 12.5% due to difference in risk-free rate (different time horizon taken into account)
and additional risk premium in SME segments and mortgage portfolios. A similar
result can be found in PECDC (2013a). The academic discussion on appropriate-
ness of certain discount rates to estimate economic LGDs also has already signi-
ficant history. A good overview can be found in Maclachlan (2005).
Due to the generally long duration of a recovery process, the choice of
the discount rate is definitely one key driver for the LGD estimate and may cause
significant RWA differences. A clear definition such as the choice of the effec-
tive interest rate in the final standard should lead to more comparable results
than the wide range allowed in the regulatory context.
When comparing amortized cost accounting with an idealized fair value
as done in Section 3, the changing cost and capital structure after default may
cause additional inconsistencies. Defaulted transactions generally require more
intensive collections efforts which may justify increased cost allocation. On the
other hand, significantly reduced capital requirements while assuming un-
changed profit expectations by unit of capital may offset this effect. The total
of these differences may lead to additional hidden reserves or hidden liabilities.
The conservatism considerations from Section 5, where we have shown
that the original risk level is already included in the gross exposure value (GCA),
are less relevant in bucket 3. Although bucket 3 contains the same type of im-
 26

plicit conservatism, compared to the total loss expectation for already defaulted
transactions, this structural conservatism in the final standard is relatively small.
The final accounting standard summarizes the following arguments for
the choice of the discount rate in its basis for conclusions: (a) the effective inte-
rest rate is the conceptually correct rate and is consistent with amortized cost measu-
rement; (b) it limits the range of rates that an entity can use when discounting cash
shortfalls, thereby limiting the potential for manipulation; (c) it enhances comparabili-
ty between entities; and (d) it avoids the adjustment that arises when financial assets
become credit-impaired (interest revenue is required to be calculated on the carrying
amount net of expected credit losses) if a rate other than the effective interest rate has
been used up to that point. The method suggested for calibration of the LGD me-
thod can be found in section 7 of the first reference, at the end of this article.
Nevertheless it should be emphasized that all Brazilian FIs are, so far,
still using standardized approach in Credit Risk, so some changes must be ap-
plied to the methodology, in a way that only EL would be backtested for both NPL
and PL.
Moreover, local rules, set by Banco Central, concerning the booking of
provisions (Resoluo 2682/99) must be updated in order to comply with IFRS 9
requirements. As is, it demands provisions for incurred losses only, without con-
sidering future impact of impaired loans. One simple approach would be to cre-
ate off-balance provisions, but it would undermine the very purpose of IFRS 9,
which is to avoid excessive profit distribution, among shareholders, of amounts
that should be posted to reserves instead. The use of such off-balance provi-
sions could be used to cap the amount of bottom-line profit that could be dis-
tributed, imposing the posting of in-balance reserves, but then other local laws
and rules (including CVM ones) come in the way. Therefore, a full locally com-
pliant methodological approach could be developed only after such updates, in
laws and regulations, effectively take place.
Meanwhile those FIs that eventually apply to IRBA approach (so are alre-
ady calculating LGD for their portfolios) could benefit from the aforementioned
methodology for risk management purposes.

8. Summary and Conclusions

Although it is certainly too early for a general statement about the me-
thodological consequences of the finally released accounting standard for im-
pairment, proposals on the three topics were presented:
First topic was the discussion of conservatism in the upcoming IFRS 9 im-
pairment standard in buckets 1 and 2 due to the chosen compromises during de-
velopment. The methodological understanding of these specific choices and the
quantification of the resulting deviations from an economically justified value are
necessary to separate the effects of implementation details (such as the selec-
tion of signals for the increase in risk in bucket 2) from actual risk performance.
 27

In the following section, the framework Impact of Risk is applied to

effectively quantify and validate economic impacts on credit risk. Further empi-
rical analyzes must follow on basis of specific portfolios before a definitive sta-
tement of significance and validity is possible. In any case, a deeper analysis of
portfolio model behavior in the lower 80% - 95% quantiles of the loss distribution
will be necessary to justify forward looking assumptions in impairment accoun-
ting. Otherwise the final accounting standard could introduce significant pro-
-cyclicality, which in turn may lead to increasing overall risk levels in the finan-
cial industry and could cause additional systemic risk in the worst case.
The closing section briefly introduces NPL Dashboard, which was used
to validate LGD methods based on short time series in a moving window con-
text. Its systematic application in the framework of portfolio monitoring or in
the form of vintage analysis for more structural studies will make it possible
to quantify the influence of internal and external process changes, and cyclical
economic factors on the LGD. The detailed approach could be found in the first
reference (Reitgruber, 2015) on the following reference list.
Considerations about how to apply this framework in current (or future)
Brazilian FI context will be discussed in the near future.
Authors

Wolfgang Reitgruber
Holds a degree in Technical Mathematics (Dipl.-Ing. Dr.) from University of Technology in Vienna.
After starting in the research area of econometrics and time series analysis, he accumulated al-
most 20 years experience in analytics in the banking industry. His responsibilities covered mostly
credit risk management (up to successful A-IRB implementation in UniCredit Bank Austria AG),
but extend into finance, process and 6-sigma-quality management as well. Currently he is part-ti-
me research- and consulting oriented, covering EL Backtesting and methodological topics of IFRS
9 impairment, while keeping a senior position in credit risk modelling in the bank.
E-mail: wolfgang.reitgruber@outlook.com

Carlos Antonio Campos Nogueira

Has a degree in Physics (PUC-RJ) and a Masters degree in Astrophysics and Elementary Particles
(Centro de Pesquisas Fsicas-CBPF/CNPQ). A practice Leader in the TI consulting area, has more
than 30 years of continuous experience, providing services to more than 40 clients in 70+ projects.
Has been conducting Basel II/III (as well as other regulatory-like or Risk Management related) pro-
jects for the past eight years. He is MD and founding partner in InterlliSearch.
E-mail: can@intellisearch.com.br
 28

References REITGRUBER, Wolfgang (2015): Methodological thoughts on expected loss estimates for IFRS
9 Impairment: hidden reserves, cyclical loss predictions and LGD backtesting. http://ssrn.com/
abstract=2641688, V2, Jan 4, 2015

REITGRUBER, Wolfgang (2013): Expected loss and Impact of Risk: backtesting parameter-based
expected loss in a Basel II framework. Journal of Risk Model Validation 7(3), 59-84

BENSTON G. J. e WALL L. D. (2005): How Should Banks Account for Loan Losses. Economic
Review Fourth Quarter 2005, 19-38

BERD, Arthur M. (2013): Lessons from the Financial Crisis 2nd Impression, Insights from the
defining economic event of our lifetime. Incisive Media, Risk Books

BIS (2013a): Directive 2013/36/EU of the European parliament and of the council of 26 June 2013

BIS (2013b): Regulation (EU) No 575/2013 of the European parliament and of the council of 26 June 2013

BCKER, Klaus (2010): Rethinking Risk Measurement and Reporting Vol II. Incisive Media, Risk Books

DIEBOLD, Francis X.; DOHERTY, Neil A.; HERRING, Richard J. (2010): The Known, The Unknown,
The Unknowable in Financial Risk Management, Princeton

DOMIKOWSKY Christian, BORNEMANN Sven, DLLMANN Klaus, PFINGSTEN Andreas (2014):

Loan Loss Provisioning and Procyclicality: Evidence from (more than) an Expected Loss Model,
Working paper Sept 9, 2014

EBA (2013): Third interim report on the consistency of risk-weighted assets: SME and residential
mortgages, Dec 17, 2013

EBA (2014a): Consultation paper, Draft Regulatory Technical Standards on materiality threshold of
credit obligation past due, Oct 31, 2014

EBA (2014b): Consultation paper, Draft Regulatory Technical Standards on the specification of the
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the requirements to use the IRB Approach, Nov 12, 2014

GABER, Thomas (2013): Die Qualitt der Finanzberichterstattung bei Banken: Empirische
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GRNBERGER, David (2012): Expected Loan Loss Provisions, Business- and Credit Cycles
(December 10, 2012). Available at SSRN: http://ssrn.com/abstract=2187515 or http://dx.doi.
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 29

References HACKL, Rainer (2014): Analysis of ELNPL based on the LGD parameter: A theoretical study and
a practical back-testing approach. Master Thesis, Vienna University of Economics and Business

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