Re-evaluating Loss Forecasting Methodologies

This presentation serves as a technical report aimed at re-evaluating how lenders model the relationship between macroeconomic factors and portfolio default rates. It emphasizes the importance of incorporating forward-looking indicators into provision models to meet IFRS 9 compliance and to conduct stress testing for ACS or ICAAP requirements. The report outlines the limitations of traditional regression models that link historical macroeconomic trends with default rates, noting that unique downturns and company-specific factors complicate this relationship. The presentation introduces a new approach that connects macroeconomic drivers to components of affordability, such as income and expenditure. By forecasting these components based on economic indicators, lenders can better estimate changes in default rates. Additionally, this method allows for account-level affordability forecasts, enabling proactive measures to support customers at risk of financial vulnerability. The presentation aims to challenge conventional methodologies and provoke thought on innovative strategies for loss forecasting.