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A Methodology to Measure Impacts of Scenarios Through Expected Credit Losses

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  • Mahmood Alaghmandan
  • Meghal Arora
  • Olga Streltchenko

Abstract

In this paper, we present a methodology for measuring the impact of scenarios on the expected losses of exposures by leveraging the existing provisioning infrastructure within financial institutions, where scenario effects are captured through changes in probabilities of default. We then describe how to design and implement a scenario test where risk drivers are given for standardized groupings of exposures, and the groupings are defined based on common features of the exposures. The methodology presented served as a theoretical foundation for the standardized climate scenario exercise conducted in 2024 by the Office of the Superintendent of Financial Institutions of Canada and Quebec's Autorite des Marches Financiers.

Suggested Citation

  • Mahmood Alaghmandan & Meghal Arora & Olga Streltchenko, 2026. "A Methodology to Measure Impacts of Scenarios Through Expected Credit Losses," Papers 2602.01361, arXiv.org.
    • Handle: RePEc:arx:papers:2602.01361
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    References listed on IDEAS

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    1. Alexandros Nikas & Haris Doukas & Andreas Papandreou, 2019. "A Detailed Overview and Consistent Classification of Climate-Economy Models," Springer Books, in: Haris Doukas & Alexandros Flamos & Jenny Lieu (ed.), Understanding Risks and Uncertainties in Energy and Climate Policy, pages 1-54, Springer.
    2. Douw Gerbrand Breed & Jacques Hurter & Mercy Marimo & Matheba Raletjene & Helgard Raubenheimer & Vibhu Tomar & Tanja Verster, 2023. "A Forward-Looking IFRS 9 Methodology, Focussing on the Incorporation of Macroeconomic and Macroprudential Information into Expected Credit Loss Calculation," Risks, MDPI, vol. 11(3), pages 1-16, March.
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