The application of the forward-looking approach as set out by the IFRS9 accounting standard has introduced a certain discontinuity compared to the practices already established in the banking system, both regarding stress testing and strategic planning. Indeed, for the first time expectations regarding the economic cycle are introduced directly into the expected loss inference models, and therefore provisioning models, through a more structured method which not only considers an expected scenario (baseline) and a worst case scenario such as in the stress testing framework, but also considers a “range of outcomes”, i.e. a range of alternative forecasts of the expected economic trend.
The methodology assumes that the losses relating to each of the possible alternative scenarios are estimated and that they are weighted by the probability of occurrence. Implicitly, therefore, the new forward-looking view introduces greater volatility in the loss estimations, attributable to the natural and inherent uncertainty about the model's structure and the implicit presence of discretionary elements in these assessments.