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Market events during the coronavirus disease 2019 (COVID-19) pandemic exposed flaws in the econometric models used to derive International Financial Reporting Standards (IFRS) 9 impairments. Models were unable to capture the level of government intervention or predict the economic recovery process because of the unprecedented nature of the pandemic.

This study examines the causes of the challenges experienced with the IFRS 9 models during the pandemic and approaches to minimise this risk in the future.

Structural correlation breaks forced banks to replace the IFRS 9 models with expert overlays or rapidly rebuild the models to reduce impairment volatility and manage the impact on earnings. Expert judgement may lead to biased outcomes.

Behavioural finance theory suggests that emotion and cognitive …