CECL Under Stress: Lessons from IFRS 9

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CECL under stress: lessons from IFRS 9 Stéphane Frédéric Gagné Senior Director, Enterprise Stress Testing Royal Bank of Canada 0 Disclaimer .The views expressed herein are those of the presenter and do not represent the views of Royal Bank of Canada. .This document is presented to facilitate, and be coincident with, verbal commentary. Neither subject matter content, nor context, should be inferred in the absence of that commentary. 1 Canadian financial landscape .Dominated nation-wide by the “Big Five” Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce .Complemented with 4 regional institutions 1 credit union and 3 banks: Desjardins Group, National Bank of Canada, Canadian Western Bank, Laurentian Bank of Canada .About ~60 local, niche or ethnic-oriented banks, trusts, and credit unions Note: simplified tour of deposit-taking institutions in Canada 2 IFRS 9 & Current Expected Credit Loss (CECL) • During Financial Crisis, the G20 tasked global accounting standard setters to create a high-quality global standards. • IFRS 9 & CECL introduced forward-looking Expected Credit Loss to better measure credit loss recognition. • Canada and Europe: IFRS 9 implemented in 2018. • United States: CECL 2019/2020. 2008-2009 2014 2016 2018 2019-2020 Financial IFRS 9 CECL IFRS 9 CECL Crisis Announced Announced Effective Implemented 3 IFRS 9 vs. CECL IFRS 9 CECL • 3-stage Approach • Performing vs non- performing • Discounted Cash Flow • Flexible Methodology • Multi-Scenario • Single/Multi-Scenario • Expected Usage of • Disregard undrawn Undrawn Commitment commitment 4 IFRS 9 Stages Stage 1 Stage 2 Stage 3 ‘Performing’ ‘Under-performing’ ‘Non-performing’ When significant increase in credit Impaired exposures risk occurs 12-month Lifetime Lifetime expected expected expected credit losses credit losses credit losses 5 IFRS 9 Business as Usual - Scenarios Y0 Y1 Y2 Y3 Y4 Y5 6 Various approaches for IFRS 9 under stress Unrealistic Realistic Bird’s Feet Approach Multiple Time-0 Scenarios First Generation Real-world vs. UK / Europe Management-view Stress Tests Scenarios Adjusted Perfect Foresight Unadjusted Perfect Foresight Simple Complex 7 Stress Scenario Y0 Y1 Y2 Y3 Y4 Y5 8 Bird’s Feet Approach - Scenarios Y0 Y1 Y2 Y3 Y4 Y5 9 Perfect Foresight (Unadjusted) - Scenario Y0 Y1 Y2 Y3 Y4 Y5 10 Perfect Foresight (Unadjusted) - ECL Y0 Y1 Y2 Y3 Y4 Y5 11 Adjusted Perfect Foresight - ECL Y0 Y1 Y2 Y3 Y4 Y5 12 Real-world vs. Management-view Scenarios Y0 Y1 Y2 Y3 Y4 Y5 13 Multiple Time-0 Scenarios Y0 Y1 Y2 Y3 Y4 Y5 14 Lessons… 15 Thank you for your attention! 16.

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