CFM Indosuez Wealth Management Annual Report 2022 70 - CFM Indosuez Wealth 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 (Stage 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 heavily discounted financial asset which reflects the credit losses suffered. 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 observation period (90 days) 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 based on the organisation implemented within the framework of the Basel system. The Group’s Risk Management Department is responsible for defining the methodological framework and for supervising the system for making provision for amounts outstanding; The Group primarily relies on the internal rating system and 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 and extrapolation based on reasonable scenarios. All available, relevant, reasonable and justifiable information, including information of a forward-looking nature, must be retained. The calculation formula includes the parameters for Probability 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. IFRS 9 recommends a Point in Time analysis while having 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 (Stage 1) is a portion of lifetime expected credit losses (Stages 2 and 3) , 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 within twelve months. Expected credit losses are discounted at the EIR used for initial recognition of the financial instrument. 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 CFM Indosuez Wealth 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 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. The models and parameters used are backtested at least annually. Forward-looking macro-economic data are taken into account in a methodological framework applicable at two levels: - at Group level for determining a shared framework for considering forward-looking data in forecasting PD and LGD parameters over the transaction amortisation period; - at the level of each entity with respect to its own portfolios. Significant deterioration of credit risk All Group entities must assess the credit risk deterioration for each financial instrument from the origin to each reporting date. Entities classify their transactions by risk category (Stages) based on this assessment of the change in credit risk. The Group plans to assess significant deterioration using a process based on two levels of analysis: - an initial level based on relative and absolute Group rules and criteria that apply to Group entities;
RkJQdWJsaXNoZXIy NzMxNTcx