Research On The Impact Of Expected Loss Model On China's Commercial Banks

The new CAS 22,Financial Instrument has been announced by MOF,which applies the Expected Loss Model and will take effect at 1 Jan 2019.Expected Loss Model use the expected credit loss in the 12 months or during the whole lifetime to replace the incurred loss model.In the Expected Loss Model,financial instruments are divided into three steps by measuring the increase of the default risk since initial recognized and use different methods to calculate the interests income.The main difference between the Expected Loss Model and the incurred loss model are the impairment events and considering the expected credit loss when calculating rates.Expected Credit Loss is the weighted average of the credit loss using the default risk.When financial instruments are devided into step 1 and sharing the similar risk characters with large amounts of other instruments,they can be grouped to calculate the impairment by probability of default methods.The data from Bank A Branch H is used as simulation example and divided into 3 steps because the Expected Loss Model has not taken effect yet.The conclusion of the simulation is that the Expected Loss Model can relaect the credit risk earlier and is closer to the actual default rates.Finally,some suggestions have been given to the CPAs when auditing the impairment.