Validation nightmare: the slotting approach under International Financial Reporting Standard 9

PROROKOWSKI, Lukasz, Oleg DEEV and Jena-Daniel GUIGOU. Validation nightmare: the slotting approach under International Financial Reporting Standard 9. Journal of Risk Model Validation. LONDON: INCISIVE MEDIA, 2021, vol. 15, No 2, p. 63-100. ISSN 1753-9579. Available from: https://dx.doi.org/10.21314/JRMV.2021.003.

Basic information

• Original name: Validation nightmare: the slotting approach under International Financial Reporting Standard 9
• Authors: PROROKOWSKI, Lukasz (616 Poland, guarantor, belonging to the institution), Oleg DEEV (643 Russian Federation, belonging to the institution) and Jena-Daniel GUIGOU.
• Edition: Journal of Risk Model Validation, LONDON, INCISIVE MEDIA, 2021, 1753-9579.

Other information

• Original language: English
• Type of outcome: Article in a journal
• Field of Study: 50206 Finance
• Country of publisher: United Kingdom of Great Britain and Northern Ireland
• Confidentiality degree: is not subject to a state or trade secret
• WWW: URL
• Impact factor: Impact factor: 0.250
• RIV identification code: RIV/00216224:14560/21:00122805
• Organization unit: Faculty of Economics and Administration
• Doi: http://dx.doi.org/10.21314/JRMV.2021.003
• UT WoS: 000710932000005
• Keywords in English: slotting approach; specialized lending; real estate; International Financial Reporting Standard 9 (IFRS 9); staging; polynomial fitting
• Tags: International impact, Reviewed

Abstract

This paper makes an important contribution to the practice of validation by focusing on an under-researched area of the slotting approach to real estate specialized lending under the International Financial Reporting Standard 9 (IFRS 9) framework. The paper introduces the concept of mapping the probability of default estimates to the slotting scores. A sequential process for deriving the correspondence between the slotting scores and probabilities of default of a particular obligor is proposed as a solution to adapting the slotting approach to the IFRS 9 rules. This solution is especially useful for capturing the increase in credit risk under the IFRS 9 rules using denotching and staging processes. All in all, this paper addresses the research questions of whether and how a slotting model can be used for IFRS 9 compliance purposes. In addition to the core aim of the paper, which is the provision of a probability of default mapping solution under the IFRS 9 framework, we also explain the methodology of a slotting model, discussing specific modeling choices for the real estate slotting approach aligned to the relevant regulatory framework. In doing so, we provide an example of a slotting model that can be used by practitioners as a challenger model during the validation exercise.