A Stage 1 credit exposure is a loan, debt security or loan commitment that, under the impairment rules of IFRS 9, has not experienced a significant increase in credit risk since it was first recognised. Almost all newly originated lending starts here, and in a healthy portfolio most assets remain here. For these exposures the lender holds a loss allowance equal to twelve-month expected credit loss: the lifetime losses that would result from defaults that may occur within the next twelve months, weighted by their probability.
Interest income on a Stage 1 asset is calculated on its gross carrying amount, before deducting the allowance. At each reporting date the lender tests for a significant increase in credit risk; if one is found, the asset moves to become a Stage 2 credit exposure with a larger, lifetime allowance. The framework as a whole is described under staging under IFRS 9.