The Prudential Regulation Authority (PRA) has written to chief financial officers at selected PRA-regulated deposit-takers with thematic feedback from its review of written auditor reports received in 2025 on International Financial Reporting Standard 9 expected credit loss (IFRS 9 ECL) accounting, including how climate-related risks are reflected in ECL. While noting ongoing improvements in firms’ capabilities and governance, the PRA highlights the need for more timely recognition of changes in credit risk in a volatile environment and further enhancement of approaches to quantify and embed climate risk drivers in ECL processes. Key themes include elevated model risk and the importance of challenging the responsiveness of ECL processes and the completeness of post model adjustments, progress and gaps in multi-year model redevelopment plans (particularly for corporate models), and the need to strengthen model operating boundaries, monitoring and validation in line with Supervisory Statement 1/23. The PRA also flags risks of historical bias in Loss Given Default (LGD) recovery assumptions, calling for stronger early-warning indicators and governance for vulnerable sectors and more granular LGD models supported by broader recovery data. On climate risk, it encourages wider and more granular assessment of risk drivers across sub-portfolios and sub-sectors, better consideration of interactions with other economic headwinds and end-of-term refinancing risk, and more comprehensive incorporation of climate variables into scenarios and loan-level ECL estimates as data quality improves, noting that no firm identified an immediate material ECL impact. The annex sets out narrowed areas of focus for benchmarking and for the PRA’s 2026 analysis, for which auditors have been asked to provide views on firms’ progress. The next round of written auditor reporting will also be used to examine governance and processes around source data quality, data flows and aggregation, and the robustness of processes for capturing the effects of securitisation transactions on ECL, alongside ongoing supervisory work on securitisation-related risks including step-in risk expectations effective from 1 January 2026.
Prudential Regulation Authority2025-09-30
Prudential Regulation Authority flags elevated IFRS 9 expected credit loss model risk and climate-risk incorporation gaps and adds 2026 auditor focus on data aggregation and securitisation
The Prudential Regulation Authority (PRA) gave feedback to CFOs of selected deposit-takers on auditor reports about IFRS 9 expected credit loss (ECL) accounting, stressing timely credit risk recognition and better climate risk integration. Key issues include model risk, robust ECL processes, and addressing historical bias in Loss Given Default (LGD) assumptions. The PRA also outlines focus areas for its 2026 analysis, including data quality and securitisation-related risks.