I talked about the new international accounting standard, IFRS 9 in this blog last week. And its still on my mind, particularly after last week’s interest rate rise and the clear signal from the Bank of England that there are more hikes to come.
There’s no doubt that the interest rate rise is going to cause pain. Ben Broadbent, a deputy governor of the Bank of England, when questioned last week about the pain the hike would cause households was pretty clear when he said: “There will be some and it’s one part of how monetary policy works.”
What is IRFS 9?
Let’s remind ourselves of the importance in this context of IFRS 9. IFRS 9 governs how banks account for loan loss provision and comes into force from 1st January 2018. The standard instructs banks to start accounting for expected loan losses from the day they first lend money or invest in a financial asset. It’s a forward looking accounting model, designed to anticipate problems rather than react to defaults and losses once they have occurred.
So, we have a situation where we can be pretty sure that millions of borrowers across the country are going to feel their household budget squeezed and we have a welcome new accounting standard that instructs banks to anticipate when their customers are going to find it difficult to make their payments.
This raises obvious questions. How are the banks going to know which of their customers are at a tipping point? How can they tell which customers might weather the storm of last week’s interest rate, but will go under if there’s another hike?
Can We Anticipate Financial Distress?
Castlight is already there with the solution and some of the UK’s banks are already working with us.
Castlight’s CaaS product (Categorisation as a Service) has been developed to help lenders respond to IFRS 9 and not only lend responsibly but monitor the health of a loan with unprecedented ease, accuracy and insight.
CaaS technology categorises customers’ transactional data into 155 distinct categories of income and discretionary and non-discretionary spending. Its powerful analysis and reporting function will also show up “red flags” where vulnerable customers are showing changes in spending patterns or behaviour.
The way this works in practice is that banks use our monthly “CaaS batch service”, where we run batches of customers transactional data through CaaS. In seconds, comparisons are made with previous months and red flags pop up highlighting accounts that are showing signs of stress. And of course, behind these red flags and stressed accounts are vulnerable households on the brink of financial trouble.
CaaS is a tool for our times. Banks need it to respond to IFRS and lend responsibly. And with further interest rate hikes around the corner, everyone needs to know that their lender is looking out for any distress signals and is ready and able to help.