A Stage 2 credit exposure is a loan or other financial asset that, under IFRS 9, has shown a significant increase in credit risk since initial recognition but for which there is not yet objective evidence of impairment. The borrower is still paying but is judged materially more likely to default than when the loan was made. Typical triggers are a marked rise in the estimated probability of default, placement on a watch list, forbearance, or payments more than 30 days overdue.
The loss allowance for a Stage 2 asset equals lifetime expected credit loss, covering defaults that may occur at any point over its remaining life, which is usually several times the twelve-month figure held for a Stage 1 credit exposure. Interest is still calculated on the gross carrying amount. The asset returns to Stage 1 if its risk recovers, or becomes a Stage 3 credit exposure if it becomes credit-impaired.