12-month Expected Credit Losses
From Open Risk Manual
Definition
12-month Expected Credit Losses in the context of IFRS 9[1] denote the portion of Lifetime Expected Credit Losses that represent the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
Formula
Conceptually the definition is captured in the following mathematical expression
- Where t is the reporting date
- i denotes possible times of default / loss (normally associated with instrument cashflows) within the 12-month period
- di is the random (unknown) event of default at time i
- LGD denotes Loss Given Default
- EAD denotes Exposure at Default
- D(t,i) denotes the discount rate at time t (based on the Effective Interest Rate, for the different cashflow maturities i
- Ft denotes the subjective but Forward-Looking Information set used formulate the estimate at time t
- P denotes the subjective assignment of default probabilities to the events di
This formula captures the essence of the definition, in practice evaluation of the 12-month portion LECL may utilize a variety of simplified / approximate forms. A common simplification is the use of the concept of 1-year Probability of Default
References
- ↑ IFRS Standard 9, Financial Instruments