Significant increase in credit risk (stage 2)

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

Under expected credit loss accounting, a performing loan carries a provision for twelve months of expected loss; once its credit risk has increased significantly since it was made, it moves to stage 2 and carries the loss expected over its whole remaining life. The borrower may have missed no payment — the jump in the provision comes from the longer horizon, not from a default. A move to stage 2 is often the first place a borrower's deterioration shows in the bank's own accounts, ahead of any arrears.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.