how to calculate probability of default ifrs 9

​Calculating the Probability of Default (PD) under IFRS 9 involves a combination of statistical analysis, historical data, and forward-looking information. The PD is a critical component in estimating the Expected Credit Loss (ECL). Here is a general approach to calculate PD:

1. **Data Collection and Segmentation**:

   - Collect historical data on loan defaults or credit losses.

   - Segment the portfolio into groups with similar credit risk characteristics (e.g., by industry, geography, credit rating, or loan type).

2. **Historical Default Analysis**:

   - Analyze historical default rates within each segment.

   - Adjust for any data limitations or anomalies.

3. **Statistical Modeling**:

   - Develop statistical models to analyze the relationship between defaults and various risk factors (e.g., macroeconomic indicators, borrower-specific variables).

   - Common models include logistic regression, survival analysis, or machine learning algorithms.

4. **Adjustment for Forward-Looking Information**:

   - Incorporate forward-looking information and economic forecasts to adjust historical default rates.

   - Consider factors such as economic growth projections, industry trends, and changes in credit market conditions.

5. **Probability of Default Estimation**:

   - Use the statistical model to estimate the probability of default for each segment over the relevant time horizon (12-month or lifetime, depending on the stage under IFRS 9).

6. **Validation and Back-Testing**:

   - Validate the model by comparing its predictions with actual outcomes.

   - Perform back-testing to ensure the model's accuracy and reliability over time.

7. **Adjustment for Model Risk and Uncertainty**:

   - Make adjustments to account for model risk and uncertainty.

   - This could involve using conservative assumptions or stress testing the model under adverse scenarios.

8. **Documentation and Governance**:

   - Document the methodology, assumptions, models, and data used in the PD calculation.

   - Ensure there is appropriate governance and oversight of the PD estimation process.

9. **Regular Reviews and Updates**:

   - Regularly review and update the PD estimates to reflect new data, changes in economic conditions, and any improvements in modeling techniques.

It's important to note that PD calculation requires significant judgment and expertise in credit risk modeling. Different entities might use different methodologies based on their specific portfolios, data availability, and industry practices. The approach should be robust, well-documented, and compliant with the requirements of IFRS 9.