Glossary: ECL, IFRS 9, Basel, and Related Risk Concepts

1. Expected Credit Loss (ECL)

A forward-looking estimate of losses a company expects to incur if customers fail to pay their debts.

• Based on Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD).

• Required by IFRS 9 to ensure credit risk is recognized early.

2. IFRS 9 (Financial Instruments Standard)

An international accounting standard that defines how to classify, measure, and record financial assets and liabilities.

• Replaced the “incurred-loss” model with the ECL (Expected Credit Loss) model.

• Promotes early recognition of losses and more realistic financial reporting.

3. Basel Framework (Basel I, II, III)

A set of international banking regulations created by the Bank for International Settlements (BIS).

• Ensures banks maintain enough capital buffers to cover credit, market, and operational risks.

• Focuses mainly on unexpected losses.

• Works alongside IFRS 9 but for regulatory, not accounting, purposes.

4. Expected Loss (EL)

The average loss anticipated over time due to predictable defaults.

• Planned for and provisioned through ECL in accounting.

• Example: Small, regular customer defaults each year.

5. Unexpected Loss (UL)

Losses that occur beyond expectations, caused by unusual or severe conditions.

• Covered by Basel capital requirements.

• Example: A sudden large client insolvency during an economic downturn.

6. Catastrophic Loss (CL)

Extremely rare, system-wide losses that threaten financial stability.

• Managed at a regulatory or central-bank level.

• Example: Global financial crisis or widespread corporate collapse.

7. PIT – Point-in-Time Approach

A credit-risk model that measures a borrower’s current and near-term risk level based on the latest data.

• Adjusts quickly to economic or behavioral changes.

• Used for IFRS 9 ECL calculations because it reflects today’s risk.

8. TTC – Through-the-Cycle Approach

A modeling method that averages a borrower’s risk across an entire economic cycle.

• More stable and less sensitive to short-term changes.

• Often used for Basel regulatory models and long-term portfolio risk management.

9. Monte Carlo Simulation

A statistical technique that runs thousands of random scenarios to model uncertainty and estimate possible losses.

• Average outcome = Expected Loss

• Tail outcome = Unexpected Loss
  Used in both ECL and Basel modeling to understand potential risk distributions.

10. GDP – Gross Domestic Product

The total value of all goods and services produced in a country over a specific period.

• Measures the size and health of the economy.

• Rising GDP = growth; falling GDP = contraction.

11. Repo Rate (Repurchase Rate)

The interest rate at which the South African Reserve Bank (SARB) lends money to commercial banks.

• Influences all borrowing rates.

• Raising the repo rate slows inflation; lowering it stimulates spending.

12. CPI – Consumer Price Index

Tracks the average change in prices of household goods and services — an indicator of inflation.

• Rising CPI = higher cost of living.

• Stable CPI = controlled inflation.

13. Credit Loss Classes (Risk Layers)

The hierarchical view of loss exposure:

1. Expected Loss – routine, provisioned (ECL).

2. Unexpected Loss – rare, covered by capital.

3. Catastrophic Loss – systemic, managed by regulators.

14. Link Between IFRS 9 and Basel

15. Why ECL is Important

• Ensures financial accuracy and transparency.

• Meets IFRS 9 compliance requirements.

• Supports proactive credit management.

• Prevents surprises from unexpected defaults.