cash flow forecasting, which predicts the repayment of future borrowers and guarantors, as well as the disposal and realization of collateral or borrowed self-owned assets in terms of customers or single financial assets, and determines the cash flow that users can repay debts.
calculate the discounted present value, which is calculated by discounting the future cash flow, with the original loan contract interest rate as the discount rate and the difference between the estimated recovery time and the current time as the discount period, to obtain the present value of the future cash flow.
finally, the part whose present loan value is lower than the original loan book value is regarded as the loss reserve amount.
there are many ways to discount cash flow, which are common: cash flow from borrower's operation, cash flow generated by guarantor's compensation, liquidation of collateral, liquidation of seized property.
in the migration model test, firstly, the financial assets are grouped reasonably (banks often use five-level classification or credit rating grouping), and the financial assets loss reserve is determined according to the asset migration at the combination level. The migration test divides financial assets into several combinations with the same credit risk characteristics, and then calculates the migration rate and loss rate of each level of assets in the combination, and multiplies the balance of financial assets at each level with the corresponding loss rate at the test time, so as to obtain the loss reserve that should be accrued for financial assets at each level.
the formula for calculating the loss rate is:
M is the number of steps for calculating the loss rate by using the migration model, and n is the number of steps for directly determining the loss rate; M+N is the number of all levels; P is the mobility of financial assets from I level to J level; Li is the provision ratio for tier I subprime loans.
the rolling rate model is similar to the migration model, and the rolling rate and loss rate of financial assets between different risk categories are calculated at the combination level. The rolling rate model usually classifies loans according to the number of days overdue, and each category of loans can only roll down one period after one period. Usually, credit cards adopt the rolling rate model.
the new IFRS 9 standard stipulates that overdue credit losses refer to the weighted average of credit losses of financial instruments weighted by the risk of default.
credit loss refers to the difference between all contract cash flows receivable and all expected cash flows discounted by the enterprise according to the original real interest rate, that is, the present value of all cash shortages.
Expected credit loss is usually a probability-weighted forecast of discounted cash flow differences, that is, the credit loss after weighted average according to the default risk. The calculation of expected credit loss mainly includes key elements:
PD default probability
LGD loss given default
EAD exposure at default
Rate discount rate
LifeTime
expected credit loss ECL = PD * LGD *. (PD is divided into cumulative PD and marginal PD, and the calculation of marginal PD usually needs to sum up the expected losses of each period.)