THE BUSINESS APPLICATION
Where and how to use it
Use it for applicable impairment analysis and movement explanations once the entity’s accounting scope and policy are established. It can help explain whether a change comes from portfolio growth, deterioration, scenarios or revised assumptions.
An increased loss estimate is decomposed into new lending, changes in credit risk and changes in recovery assumptions. The finance team can then discuss the drivers instead of seeing only a new total.
From evidence to a decision
- 01Risk and cash flowsPD · LGD · EAD by period
- 02Scenario lossesApply survival and discounting
- 03Weighted aggregationCombine justified scenarios
- 04ECL and movementsExplain the estimate and changes
DATA REQUIREMENTS
What records does it need?
These are the records your team would bring together for this analysis. The exact fields and history needed depend on your lending products, the question you want to answer and the period you want to assess.
| Record category | What it contains | Why the detail matters |
|---|---|---|
| Risk term structures | PD by period, LGD and EAD paths with model versions. | Use aligned horizons and conditional meanings. |
| Facility cash flows | Schedules, effective-rate/discounting inputs and remaining life. | Apply the appropriate accounting convention. |
| Stages and scenarios | Applicable stage policy, scenario weights and paths. | Document scope, weights and assessment date. |
Past loan outcomes help assess how well an estimate reflects your borrowers. For a new decision, use only the information available at that time; later repayments help you review the result afterwards.
Understand data readiness →WHAT YOU RECEIVE
The output
Loss estimates by account, segment or portfolio with component and period movements for review.
WHAT TO WATCH
The limitations
The calculation does not establish regulatory or accounting compliance by itself. Scenario weights and applicable policy require documented justification.
FOR RISK & ANALYTICAL SPECIALISTSHow the analysis works+
The modelling approach
Scenario-weighted discounted loss aggregation uses internally consistent term structures. Marginal default probability must be distinguished from cumulative probability; survival, exposure and discounting need compatible time conventions.
What your risk team should review
Marginal versus cumulative PD, survival, scenario weights, discounting, stage horizon and reconciliation.
The right approach depends on your portfolio and available history. Review the fit to your borrowers, the reliability of the estimates and the effect of missing information before using the result in a lending decision.