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:
- Expected Loss – routine, provisioned (ECL).
- Unexpected Loss – rare, covered by capital.
- Catastrophic Loss – systemic, managed by regulators.
14. Link Between IFRS 9 and Basel
FrameworkFocusCoversPurpose
IFRS 9
Accounting
Expected Loss
Ensure realistic credit provisions
Basel
Regulation
Expected + Unexpected Loss
Ensure sufficient capital reserves
15. Why ECL is Important
- Ensures financial accuracy and transparency.
- Meets IFRS 9 compliance requirements.
- Supports proactive credit management.
- Prevents surprises from unexpected defaults.
