A significant increase in credit risk occurs when there is a marked deterioration in the creditworthiness of a borrower, indicating that the likelihood of default has risen substantially compared to the initial assessment at the time the financial instrument was recognized. This concept is crucial for determining the appropriate stage of credit loss recognition, which impacts how financial institutions measure expected credit losses and allocate provisions. Understanding when a significant increase in credit risk has occurred helps ensure accurate reporting and compliance with regulatory frameworks, enhancing financial stability.
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