When Expected Credit Loss (ECL) models were introduced, the objective was clear: recognise credit risk earlier, rather than waiting for a default to occur.
Several years later, it’s worth asking an important question have they delivered on that promise?
In many ways, the answer is yes. ECL models have encouraged organisations to adopt a more forward-looking approach to risk assessment and provisioning. They have strengthened governance and pushed businesses to rely more on data than hindsight.
At the same time, they’ve also highlighted new challenges. Forecasting future economic conditions, incorporating management judgement, and ensuring the quality of underlying data remain areas that require significant professional judgement. Two organisations can apply the same accounting standard and still arrive at different outcomes based on their assumptions.
Perhaps that’s the biggest takeaway. ECL models haven’t replaced professional judgement they’ve made it more important than ever. The quality of the numbers ultimately depends on the quality of the assumptions behind them.
