A measure of ECL (expected credit losses) in which ECL is calculated on a modelled basis. It is a level of impairment loss provisions (in relation to impaired loans and similar items such as credit cards or personal loans) that is below individual assessment threshold. These provisions are created on an aggregate basis (as to a group of items) while considering the aggregate levels of defaults, credit scores, past loss experience, security, arrears, etc.
An ECL model incorporates observable data, assumptions and estimations. The development and running of these models involves a great deal of management judgement using model parameters such as estimation of the probability of default (PD); exposure at default (EAD) and loss given default (LGD).
