Regulatory Validation Checklist

Ensure your IFRS 9 model meets IASB standards and Basel Committee guidance

Regulatory Landscape

Validating an IFRS 9 ECL model requires adherence to multiple layers of regulation. The primary standard is set by the IASB (International Accounting Standards Board), supplemented by prudential guidance from the BCBS (Basel Committee on Banking Supervision) and local regulators (e.g., EBA, PRA, Fed).

This page provides a high-level checklist to validate that your model conceptualization and implementation align with these core requirements.

IFRS 9 Standard Compliance (IASB)

The core accounting standard requirements for Expected Credit Loss (ECL) measurement.

Key Validation Points
  • Unbiased & Probability-Weighted
    Does the model use multiple macroeconomic scenarios (e.g., Base, Upside, Downside)? Is it free from optimism/conservatism bias?
  • Time Value of Money
    Are expected cash flows discounted using the Effective Interest Rate (EIR) or a reasonable approximation?
  • Reasonable & Supportable Information
    Does the model use information about past events, current conditions, and forecasts of future economic conditions?
  • Point-in-Time (PIT) PD
    Are PD estimates sensitive to the current economic cycle (unlike Basel Through-the-Cycle PDs)?
  • Significant Increase in Credit Risk (SICR)
    Are robust quantitative (PD change) and qualitative triggers (Watchlist) defined for Stage 2 transfer?

BCBS Prudential Guidance

The Basel Committee provides guidance on credit risk and accounting for expected credit losses to ensuring high-quality implementation.

Principle 1: Governance

The bank's board of directors and senior management are responsible for ensuring that the bank has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances.

Principle 2: Methodology

The bank should adopt, document and adhere to sound methodologies that address policies, procedures and controls for assessing and measuring credit risk on all lending exposures.

Principle 6: Validation

A bank's ELC measurement process should be validated regularly by an independent function. This includes backtesting against actual loss experience.

Principle 8: Disclosures

A bank should include in its financial reports quantitative and qualitative disclosures that enable users to understand the credit risk inherent in its portfolio and how management assesses it.

Model Governance Checklist

Robust governance is the backbone of a valid model. Ensure the following are in place:

Governance Area Validation Question
Independent Validation Has the model been validated by a team independent of the development team (e.g., Internal Audit or External Consultant)?
Approval Authority Has the model methodology been approved by a Model Oversight Committee or Board-level equivalent?
Performance Monitoring Is there a schedule for regular performance monitoring (e.g., quarterly backtesting, PSI checks)?
Change Management Is there a formal process for approving and documenting changes to model parameters or code?
Overrides Policy Are management overrides (Post-Model Adjustments) governed by a strict policy requiring justification and tracking?

Documentation Requirements

"If it isn't documented, it doesn't exist." Regulators require comprehensive documentation for all IFRS 9 models.

  • Methodology Document: Theory, assumptions, formulas, and rationale for choices made.
  • Data Dictionary: Definitions, sources, and quality rules for all input data.
  • Coding/Implementation Guide: Technical specs for the calculation engine (like our ECLModel).
  • Validation Report: Findings from independent validation and remediation plans.
  • User Acceptance Testing (UAT): Evidence that the system works as intended (like our Workflow Demo).
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