In a lending institution the expected credit loss provision is not one estimate among many. It is the estimate, it moves capital, and it is where the regulator and the auditor both concentrate.
What we actually test
Not the model output but the inputs. Staging: whether loans that should have moved to a higher stage actually did, and whether restructured facilities are being treated as if nothing happened. Probability of default: whether it reflects your own recovery history or a figure carried over from a prior year. Loss given default: whether collateral valuations are current and whether realisation is genuinely achievable at that value.
The restructuring question
The most common finding we raise in this sector is a facility rescheduled without being reassessed. The arrears reset, the account looks current, and the underlying credit has not improved at all. A provisioning model fed with that data will understate loss, and the effect compounds across a portfolio.
Regulatory and IFRS provisioning differ
They answer different questions and they will produce different numbers. Both are required, the reconciliation between them should be prepared and understood rather than discovered at year end, and management should be able to explain the difference to a board without reaching for the auditor.
Capital is a live number
Capital adequacy is monitored continuously, not calculated annually. Where a provision increase would breach a ratio, that needs to be known in the month it arises rather than in the audit. Institutions that model this monthly have options. Those that do not, do not.
Expected credit loss, the judgement that moves capital
Where the most common provisioning error sits
How often capital adequacy should actually be modelled
Findings
What we find in lending institutions
Concentrated in the provisioning model and the data feeding it, rather than in the accounting entries.
- Restructured facilities reset to current without credit reassessment
- Staging criteria applied mechanically, missing qualitative deterioration
- Probability of default carried forward rather than derived from your own recovery data
- Collateral valuations years old, and realisation assumed at book value
- Related party and staff lending outside normal credit process
- Regulatory and IFRS provisioning differences unreconciled until year end
- Capital adequacy modelled annually rather than monthly
- Interest suspended inconsistently across the non-performing book
Services
What financial services clients use us for
Audit and the provisioning work dominate, with advisory following where capital or restructuring is in question.
Statutory audit
Expected credit loss, staging, collateral and the regulatory reconciliation.
Explore →Internal audit
Credit process, disbursement authority, related party lending and branch controls.
Explore →IFRS implementation
IFRS 9 model design, documentation and first-time application.
Explore →Valuation and due diligence
Portfolio valuation, recapitalisation support and transaction work.
Explore →Questions
Questions from lending institutions
How do you approach the ECL provision?
Our regulatory and IFRS provisions differ. Is that wrong?
How should restructured facilities be treated?
Can you support a recapitalisation?
Next step
Send us your provisioning model and your last three months of staging.
That is enough to tell you whether the provision is being driven by evidence or by inertia, and it is where we would start.