Expected credit loss (ECL)
Expected credit loss (ECL) is the provision a lender holds for credit losses under IFRS 9, measured over 12 months for stage 1 loans and over the loan’s lifetime for stage 2 and 3 loans. The estimate is probability-weighted across economic scenarios.
Example
For illustration, a stage 1 loan exposure of $1,000, a 12-month probability of default of 2%, and loss given default of 40% produce an ECL of $8: $1,000 × 0.02 × 0.40. This simplified calculation does not include scenario weighting.
How the three ECL stages work
Stage 1 applies before a significant increase in credit risk has occurred since the loan was made. A significant increase moves the loan to stage 2. Thirty days past due is a common backstop for identifying that increase, not the definition of stage 2.
Stage 3 applies when a loan is credit-impaired. This is often seen at 90 days past due.
How expected credit loss is calculated
The calculation uses probability of default (PD) and loss given default (LGD) against the exposure. For stage 1, the horizon is 12 months. For stages 2 and 3, the estimate covers the loan’s lifetime.
Lifetime ECL sums the expected loss for each future period and discounts it at the effective interest rate.
The estimates are weighted across economic scenarios, such as a base case and a downside case, according to their probabilities.
Questions we get asked
Is the 30-day backstop a fixed requirement?
The 30-day figure is a common backstop, not a universal cutoff. Stage 2 is based on a significant increase in credit risk since the loan was made.
Is expected credit loss the same as a loan write-off?
No. ECL is a provision held for credit losses under IFRS 9. It does not mean the loan has already been written off.
Are economic scenarios weighted equally in ECL?
Not necessarily. ECL is probability-weighted, so each scenario contributes according to its probability rather than automatically receiving equal weight.
The expected credit loss calculator calculates 12-month and lifetime ECL by stage from PD and LGD applied to exposure, with weighted scenarios.
