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The combined expertise of SAP Fioneer and Grant Thornton has brought to light strategies for financial institutions to enhance credit risk assessment and bridge gaps between finance and risk management.
As financial institutions strive to align with regulatory expectations and optimise their credit risk assessments, they face pressing challenges in developing their Expected Credit Loss (ECL) models.
These challenges include managing large amounts of data, the limitations of using desired segmentation variables, ensuring ECL results accurately predict losses, and the uncertainty surrounding the macro-economic environment.
Additionally, firms are also required to, based on risk management inputs, perform accounting for past and future events under IFRS 9 accounting and disclosure requirements.
Underscoring the need for innovative solutions to navigate these issues, the “Accounting for the Future: Enhancing ECL Modelling and IFRS 9 Compliance” webinar brought together experts from SAP Fioneer and Grant Thornton, who shared their expertise and practical insights.
Jatin Kalra, Partner of Grant Thornton, discussed the evolution of ECL models, which have been shaped by increased complexity and why there is a need for more accurate risk assessments.
Kalra emphasised that choosing the right ECL model is crucial. It should be relevant, responsive, and stable to suit the portfolio. "Model monitoring plays a very important role to help continuously reassess and redefine the models for continual use or to make changes as things evolve," Kalra said.
Further model validation, whether internal or outsourced, ensures independent scrutiny. “Based on the validation, one could better identify if the model needs to be changed, updated, or upgraded,” he added.
At the same time, automation is transforming the efficiency of ECL processes by streamlining critical areas. This technological evolution, combined with custom solutions that adapt seamlessly to changing requirements without necessitating system overhauls, is driving a more efficient and dynamic financial future.
"These adjustments can be implemented directly within ECL models without altering the system. This flexibility simplifies processes, making it easier to respond to real-time changes. As a result, ECL models become more dynamic, accurate, and adaptable," Kalra emphasised.
Fully integrated systems allow for end-to-end automation, streamlining processes from data input to final reporting. These innovations make ECL models more responsive and efficient.
Michael Hafner, Product Manager & Enterprise Architect of Finance Solutions at SAP Fioneer, explored the role of a subledger-based approach in IFRS 9 accounting. He highlighted how subledgers integrate financial instruments into the accounting flow, create synergies with risk management, and enhance financial presentation and disclosures.
Integrating risk management and finance processes is often challenging due to fragmented systems and opaque data flows. A significant gap exists between transactional and risk management systems and finance outputs, frequently bridged by custom database solutions. Ensuring clear data lineage across these systems is critical for transparency and accuracy.
SAP Fioneer addresses this challenge of integrating risk management and finance processes with its Financial Products Subledger, designed to bridge these gaps by linking transactional and risk management systems to finance and disclosure outputs, general ledger, and consolidation.
“The role of the subledger is to provide very granular information at an entity level for your financial instruments accounting, for example IFRS 9, as well as management accounting,” said Hafner.
The accounting flow progresses from transactional and risk management systems – where the most detailed data resides – to the Financial Products Subledger, which consolidates and structures this data for accounting purposes and the general ledger, which handles entity-level financial tasks; and finally, consolidation, which provides a group-level overview.
SAP Fioneer recommended shifting towards expected cash flow when approaching financial instruments accounting. This approach better reflects customer behaviours and allows tracking of future scenarios compared to contractual cash flows, which banks traditionally rely on. The expected cash flow approach supports portfolio-level accounting, enables scenario-based adjustments, and provides deeper insights for strategic bank steering beyond basic accounting.
"This allows you to not only build one accounting scenario for the future. You can create different scenarios for forecasts, plans, simulations, and sensitivity analysis on an accounting level, comparing your accounting to plan scenarios," Hafner added.
The subledger performs delta postings across key dimensions (types of cash flow, change drivers, and present values), providing interim present values for detailed insights. This structured approach allows a reporting flow that reconciles accounting flows, supports movement analysis, and meets granular reporting needs, unburdening source systems whilst enabling transparency across financial processes.
Financial institutions must address current challenges and set new standards for the future of risk management. By leveraging advanced data management solutions, automation, and integrated systems, they can be better equipped with more accurate and efficient credit risk assessments to grow in an ever-evolving financial and regulatory landscape.
This is article first appeared in The Asian Banking & Finance on 19 December 2024.