Practical approach for probability of default estimation under IFRS 9

This report is part of the conclusion of the Master degree in Mathematical Finance, as a result of a 6-month internship at EY, in Financial Services - Advisory. Due to a recent financial crisis, credit entities had to deal with uncertainty, being credit risk one of the main concerns. Risk management in this type of entities is crucial to assure financial stability, and therefore, there is always a constant need of improvement. During the financial crisis of 2008, risk management failed its man purpose since risk models reveal insufficient to capture the risk deterioration on exposures and fail to estimate credit losses under a change in the economic cycle. Therefore, IFRS 9 becomes the new standard imposed by IASB, in order to replace IAS 39. This internship was a vector to expand my knowledge concerning impairment models and the new regulatory framework of the International Accounting Standard Board based on IFRS 9 Financial instruments, by studying a general approach on a specific perspective of a Portuguese bank. This report focuses on collective impairment, regarding the choices and validation of the model for the risk parameter PD used by the bank institution in analysis under this new standard.