CFM INDOSUEZ Wealth Management - 2020 Annual Report

64 Definition of default The definition of default for the purposes of ECL provisioning is identical to that used inmanagement and for regulatory ratio calculations. Thus, a borrower is considered to have defaulted when at least one of the following two conditions is met: • where payments are past due by more than ninety days, unless special circumstances show that the arrears are due to events unrelated to the debtor’s situation; • if the entity considers it unlikely that the debtor will fully settle its credit obligations without it having to apply measures such as the enforcement of a security. An outstanding loan (Bucket 3) is depreciated when one or more events have an adverse effect on the estimated future cash flows of that financial asset. Indications of impairment of a financial asset include observable data regarding the following: • significant financial difficulties for the issuer or borrower; • a breach of contract, such as a default or overdue payment; • the granting by the lender(s) to the borrower, for economic or contractual reasons related to the borrower’s financial difficulties, of one or more favours that the lender(s) would not have considered in other circumstances; • an increasing probability of bankruptcy or financial restructuring of the borrower; • the disappearance of an active market for the financial asset due to financial difficulties; • the purchase or creation of a financial asset with a large discount, reflecting the credit losses incurred. It is not necessarily possible to isolate a particular event, as the impairment of the financial asset may result from the combined effect of several events. The defaulting counterparty will only return to a sound situation after it fully settles late payments and the other elements that caused the default (lifting of the default for the parent company, lifting of an alert which caused the default, etc.). The notion of expected credit loss (ECL) The ECL is the present value of probability-weighted estimated credit losses (principal and interest). It is the present value of the difference between contractual cash flows and expected cash flows (including principal and interest). The ECL approach aims to recognise expected credit losses as soon as possible. Governance and measurement of ECL The governance of the IFRS 9 measurement system is based on the organisation set up under the Basel framework. Crédit Agricole Group’s Risk department is responsible for defining themethodological framework and overseeing the provisioning system. The Group relies primarily on the internal rating system and the current Basel processes to generate the IFRS 9 risk parameters needed to calculate expected credit losses. The assessment of changes in credit risk is based on amodel that anticipates losses, and extrapolation on the basis of reasonable scenarios. All available, relevant, reasonable and justifiable information, including forward looking information, is used. Thecalculation formula incorporatesprobabilityof default, loss given default and exposure at default parameters. These calculations are largely based on internal models used for prudential monitoring, where they exist, with adjustments to calculate an economic ECL. IFRS 9 recommends a point in time analysis at the end of the reporting periodwhile taking into account historical loss data and forward looking macro-economic data, while the prudential view is analysed through the cycle for the probability of default and at downturn for the loss given default. The accounting approach also involves recalculating certain Basel parameters, in particular to neutralise internal collection costs or floors imposed by the regulatory authorities for regulatory loss given at default (LGD) calculations. The methods for calculating expected credit losses are to be assessed according to the types of products: financial instruments and off-balance sheet instruments. The 12-month expected credit loss is a portion of lifetime expected credit losses, representing the lifetime cash flow shortfall occurring from a default within 12 months of the reporting date (or a shorter period if the financial instrument’s expected life is shorter than 12 months), weighted by the probability of default. The IFRS 9 parameters are measured and updated according to the methodologies defined by the Group and are used to establish an initial level of reference, or shared base, for provisioning. ECL calculations take into account assets pledged as collateral and other credit enhancements that form an integral part of the instrument’s contractual conditions and that the entity does not recognise separately. The estimate of expected cash flow shortfalls on a financial instrument reflects theamount andschedule for enforcing collateral. In accordance with IFRS 9, the recognition of guarantees and collateral does not influence the assessment of a material increase in credit risk, which depends on changes in credit risk relating to the debtor without taking into account such guarantees. Backtesting of themodels andparameters used is carried out at least annually.