Exploring the Synergy between IFRS 9 and Machine Learning for Better Financial Decisions

Exploring the Synergy between IFRS 9 and Machine Learning for Better Financial Decisions

The financial industry is constantly striving for ways to improve decision-making processes, reduce risk, and increase efficiency while meeting regulatory requirements. The adoption of International Financial Reporting Standards 9 (IFRS 9) in 2018 was a game changer in terms of how financial institutions measure and manage credit risk for financial assets. The accounting standard mandates the use of probabilities of default, loss given default, and exposure at default for the calculation of expected credit losses (ECL).

However, despite the significant improvements brought by IFRS 9, traditional risk management models are known to be reactive rather than proactive in nature. Financial institutions are turning to machine learning, a subset of artificial intelligence, to supplement their risk management practices. Machine learning, which involves the use of algorithms to learn from data, has the potential to generate proactive risk assessments, helping financial institutions to make better-informed decisions.

The use of machine learning algorithms in credit risk modeling enables financial institutions to predict with greater accuracy which loans are likely to default and/or become delinquent. Machine learning makes it possible to combine traditional financial indicators and alternative data sources, such as social media behavior and credit card usage data, to build better predictive models. The models can adapt to changing circumstances and can be used to identify patterns and trends that may not be visible to the human eye.

Moreover, machine learning can help limit the impact of human bias on decision-making. Traditional credit risk management models may be influenced by personal judgments and emotions, leading to incorrect assumptions. Machine learning ensures a more objective approach, relying solely on the data and algorithms for decision-making, thereby mitigating the impact of bias on results.

The combination of IFRS 9 and machine learning leads to better-informed financial decisions while meeting regulatory requirements. The IFRS 9 accounting standard provides a framework for measuring and managing credit risk, while machine learning augments its ability to anticipate and manage that risk. The two work hand in hand to provide a more comprehensive and proactive risk management solution that can protect financial institutions from unexpected shocks.

Conclusion:

In summary, the synergy between IFRS 9 and machine learning represents a significant step forward in the development of proactive risk management practices. The combined approach allows financial institutions to leverage both the advantages of the new accounting standard and the power of machine learning to improve their risk assessments and guard against unexpected losses. While there are still challenges that need to be addressed, the potential benefits of this approach are significant. In the future, we can expect machine learning algorithms to become even more sophisticated, empowering financial institutions to make even more effective decisions.