Walk me through IFRS 9 expected credit loss staging and what triggers a move from Stage 1 to Stage 2.
An advanced Risk & Compliance question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
IFRS 9 ECL has three stages. Stage 1 (performing): recognize 12-month expected losses and interest on the gross carrying amount. Stage 2 (under-performing): a significant increase in credit risk (SICR) since origination has occurred, so you recognize lifetime expected losses, still on gross interest. Stage 3 (credit-impaired): objective evidence of impairment — interest now accrues on the net (post-allowance) amount. The Stage 1→2 trigger is SICR, judged by the change in probability of default since origination, supported by quantitative thresholds, qualitative indicators (watchlist, forbearance), and a 30-days-past-due backstop. The judgment in calibrating SICR and forward-looking macro scenarios is where most model risk and audit scrutiny sits.
WHAT INTERVIEWERS LISTEN FOR
- ✓Stage 1: 12-month ECL; Stage 2: lifetime ECL; Stage 3: impaired
- ✓Stage 1→2 trigger = significant increase in credit risk (SICR)
- ✓30-days-past-due backstop; interest on gross until Stage 3
- ✓Forward-looking macro scenarios drive ECL
COMMON MISTAKES
- ✗Confusing the stages or their interest basis
- ✗Thinking SICR means default
- ✗Ignoring forward-looking element
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