76 • 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. A particular event can not necessarily always be isolated, as the financial asset's impairment could potentially result from the combined effect of several events. The defaulting counterparty returns to a sound situation only after an observationperiod that validates that the debtor is no longer in default (assessment by the Risk Department). The notion of expected credit loss (ECL) ECL is defined as the weighted expected probable value of the discounted credit loss (principal and interest). It represents the present value of the difference between the contractual cash flows and expected cash flows (including principal and interest). The ECL approach is aimed at anticipating the recognition of expected credit losses as early as possible. ECL governance and measurement The governance of the IFRS 9 measurement mechanism is basedon theorganisation implementedwithin the framework of theBasel system. Crédit Agricole Group’s Risk department is responsible for defining the methodological framework and overseeing the provisioning system. The Group primarily relies on the internal rating systemand current Basel processes to generate the IFRS 9 parameters that are required to calculate ECL. The assessment of the change in credit risk is based on an expected loss model andextrapolationbasedon reasonablescenarios. All available, relevant, reasonable and justifiable information, including information of a forward-looking nature, must be retained. Thecalculation formula includes theparameters forProbability of Default, Loss Given Default, and Exposure at Default. These calculations are broadly based on the internal models used within the framework of the prudential system, where they exist, but with adjustments to determine an economic ECL. IFRS9 recommends aPoint inTimeanalysiswhilehaving regard to historical loss data and forward-looking macroeconomic data, whereas prudential regulation uses Through the Cycle analysis for Probability of Default and Downturn analysis for Loss Given Default (LGD). 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 reportingdate (or a shorter period if the financial instrument’s expected life is shorter than 12 months), weighted by the probability of default within 12 months. The IFRS 9 parameters aremeasured 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 andother credit enhancements that forman integral part of the instrument’s contractual conditions and that CFM Indosuez does not recognise separately. The estimate of expected cash flow shortfalls from a guaranteed financial instrument reflects the amount and timing of recovery of guarantees. In accordance with IFRS 9, the inclusion of guarantees and sureties does not influence the assessment of significant deterioration in credit risk: this is based on change in the debtor’s credit risk without taking account of guarantees. The models and parameters used are backtested at least annually. Forward-lookingmacroeconomicdata are taken intoaccount in accordance with amethodological framework applicable at two levels: • at the level of the Crédit Agricole Group in determining a shared framework for taking into account forward looking data in the projection of PD and LGD parameters over the transaction amortisation period; • at the level of eachentitywith respect to itsownportfolios. Significant deterioration of credit risk On each reporting date, all CFM Indosuez Wealth Group entities must measure the increase in credit risk on each financial instrument since initial recognition. Entities classify their transactions by risk category (Stages) based on this assessment of the change in credit risk. To determine a significant deterioration in credit risk, CFM Indosuez Wealth Group applies a process with two levels of analysis: • a first level using relative and absolute rules and criteria, applied to CFM Indosuez Wealth Group entities; • a second level based on an expert appraisal, taking in account local forward looking data, of the risk incurred by each entity on its portfolios – this appraisal may lead to an adjustment of the Group’s criteria for reclassifying exposures into Stage 2 (transfer of portfolio or subportfolio to lifetime ECL). Each financial instrument is monitored for significant deterioration, save for exceptional cases. No contagion is required for financial instruments fromthesamecounterparty to be transferred from Stage 1 to Stage 2. Monitoring of significant deterioration must consider the change in the principal debtor’s credit risk without taking account of any guarantee, including for transactions with a shareholder guarantee. Projected losses in respect of amounts outstanding that consist of small debts with similar characteristics may be estimated on a statistical basis rather than on an individual counterparty basis. Tomeasure the significant deterioration in credit risk since
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