Management Provision (ECL) Overlay?

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So Chhinn
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Joined: 21 Dec 2022, 15:22

Management Provision (ECL) Overlay?

Post by So Chhinn »

what are the methods/frameworks/guidelines for Management Provision Overlay?
Could the bank proceed with management overlay specifically at the portfolio lever, post model production?
How does the bank manage the overlay in new opening reporting period?

Thanks,
JRSB
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Re: Management Provision (ECL) Overlay?

Post by JRSB »

I have never heard of it but this is what Deloitte say...


Most banks have expanded the frequency and scope of management overlays
for impairment, as a result of Covid-19. The increased use of management
overlays has highlighted gaps in governance and controls required to ensure
ECL estimation is measured consistently across portfolios and over time. Across
Europe, different maturity levels are observed in management overlay
frameworks. Leading banks offer a clear link between underlying model
limitations and/or reasons for adjustment and each management overlay. Each
model overlay is justified and subject to independent challenge, with clear
criteria established for the overlay to reduce or change over time.
Post-model adjustments (PMAs) are a specific sub-set of management overlays,
including targeted recalibration, additional mini-models or specific expert-based
assumptions. PMAs offer a short-term fix to ECL calculations, whilst model
recalibration and rebuild options remain limited. Policy makers are rightly
pushing firms to remediate the root causes of PMAs, by enhancing models.
Where this cannot be done in a timely manner, the monitoring, analysis and
documentation of PMAs will retain a central role in the ECL control framework.
Leading banks are expected to actively manage the portfolio of PMAs, keeping
the scope, duration and conditions for unwinding management overlays under
regular review.
Practitioners and decision-makers need to understand that PMAs do not
eliminate the requirement to improve models in the long term. Management
overlays increase the reliability of ECL impairment levels in the short term.
Over-reliance on PMAs in the long term creates costs and regulatory risks which
are neither sustainable, nor justifiable. Leading banks are establishing model
development plans to enhance the granularity and sophistication of IFRS 9 ECL
model suites, to address model limitations uncovered by the crisis.
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JakobLavrod
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Re: Management Provision (ECL) Overlay?

Post by JakobLavrod »

This is a notoriously difficult area. Fundamentally, PMA and overlays are about effect that the models cannot really adjust for. A good place to start for guidelines is 2.8 in this report:

https://www2.deloitte.com/bd/en/pages/f ... banks.html

In general, the discussions I have been involved in are based on that the overlay is created from some extreme scenario with some probability. The overlay then becomes:

Overlay = (ECL_scenario - ECL)*p_scenario

Next reporting period, this exercise can be carried out again to update the overlay. ECL_scenario can be of different complexity, sometimes very expert-driven, sometimes more quantitative. By letting the scenario be quite extreme, and not covered by the normal scenarios, the risk of double counting risks are reduced, which also means that p_scenario << 1. As the tail risk decreases, p_scenario -> 0, and the overlay should be reversed. When it comes to post-model adjustments, that can often be in the form of adjusting the risk parameters themselves based on some expert assessment and PMA = ECL_new - ECL_old.

What is the more specific context of your overlay?
IFRS 9 Impairment Specialist
Risk Control at Svenska Handelsbanken
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