We would like to know whether full substitution of the guarantor parameters to the debtor’s parameters (so that ECL are effectively calculated on the guarantor) can take place when calculating ECL on a guaranteed exposure in accordance with Regulation 2016/2067 (IFRS 9) as elaborated on by EBA Guidelines 2017/06.
We have a question on the proper calculation of Stage 1 and Stage 2 impairment for a guaranteed instrument when a bank uses an ECL model based on PD and LGD parameters. This question is especially relevant for publicly guaranteed exposures.
We believe there are theoretically 2 ways of calculating the amount of ECL on a guaranteed exposure (or on the guaranteed portion of an exposure):
Banks may use a full substitution approach mirroring in accounting what they do for RWA calculation purposes. Nevertheless we believe only approach 2 is compliant with IFRS 9 in case of a post-default guarantee while approach 1 can only apply to pre-default guarantees.
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