IFRS 9 Stress Testing: How to Model ECL Under Adverse Scenarios
IFRS 9 requires multiple economic scenarios in ECL calculation. Stress testing your loan portfolio against adverse PD and LGD shocks is essential for ICAAP, board reporting and regulatory submissions.
Why stress testing matters for IFRS 9
IFRS 9 §B5.5.42 requires ECL to reflect an unbiased probability-weighted estimate across multiple scenarios. Regulators expect banks to demonstrate ECL sensitivity to adverse economic conditions — this is core to ICAAP and EBA stress test submissions.
PD shock methodology
A PD shock increases the probability of default across your portfolio. A +50% PD shock means each loan's PD is multiplied by 1.5. This simulates a deteriorating credit environment — recession, sector stress, or a systemic shock.
LGD shock methodology
An LGD shock increases the loss given default — typically driven by falling collateral values. A +25% LGD shock simulates a real estate downturn where property collateral recovers less than expected.
Standard stress scenarios
Mild stress: PD +25%, LGD +10%. Moderate stress: PD +50%, LGD +25%. Severe stress: PD +100%, LGD +50%. Recovery scenario: PD -20%, LGD -10%. EBA uses similar ranges in its annual EU-wide stress tests.
How to use LoanStage for stress testing
LoanStage's EBA Stress Test Simulator lets you apply PD and LGD shocks using sliders. The dashboard shows base ECL, stressed ECL, and the impact in EUR and percentage. You can save custom scenarios and compare them side by side.
LoanStage's stress test simulator applies PD/LGD shocks to your portfolio in real time.
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