Letter from David Bailey ‘Thematic feedback on accounting for IFRS 9 expected credit losses (ECL)’
Executive Summary
The PRA's Dear CFO Letter, issued on 30 September 2025 by David Bailey, provides thematic feedback to selected PRA-regulated deposit-takers based on its 2025 review of auditor reports on IFRS 9 expected credit loss (ECL) accounting and climate risk integration. It matters because it highlights persistent supervisory concerns around timely credit risk recognition, model limitations, recovery assumptions, and climate impacts amid economic uncertainty, urging firms to strengthen ECL processes to ensure safety and soundness. #
What Changed
- This is not a formal rule change or new regulation but thematic feedback building on prior years, with "areas of focus" for improvement:
- Model risk: Elevated due to macroeconomic/geopolitical uncertainty; firms must enhance post-model adjustments (PMAs) for completeness (e.g., affordability risks, sector vulnerabilities), granular monitoring of borrower cohorts/ECL components, and mod
- Recovery strategies: Ongoing risk of historical bias in Loss Given Default (LGD) estimates; challenge realism of recovery assumptions for vulnerable sectors/borrowers.
- Climate risks: Greater emphasis on identifying/assessing/modelling climate drivers in ECL (e.g., via expert judgement, stress tests); align with PRA's SS1/23 on model risk and upcoming clarifications from CP10/25 consultation; improve data quality, v
Suggested Considerations
- Conduct self-assessments against annex "areas of focus" (model risk, recovery, climate) and share with auditors ahead of 2026 reporting.
- Enhance PMAs: Challenge completeness for emerging risks (e.g., interest rates, sectors); link to emerging risk analysis.
- Model improvements: Monitor redevelopment plans; ensure granular monitoring, comprehensive reviews, skilled independent assurance; define model boundaries.
- Recovery processes: Strengthen challenges to LGD recovery assumptions for vulnerable exposures.
- Climate integration: Improve risk identification, quantitative analysis, data/modelling, oversight; align governance with SS1/23.
- Embed strong governance, data quality, and cross-industry sharing; CFOs/CROs to regularly review.
Key Dates
Compliance Impact
Urgency: High – Persistent issues from prior years (e.g., 2024 feedback) indicate elevated model risk in uncertain conditions could lead to PRA scrutiny, auditor findings, or enforcement if unaddressed; 2026 auditor reports will benchmark progress, risking heightened supervision. Matters for prudential stability as ECL underpins capital requirements.
Who is Affected
References
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Summary
Letter to chief financial officers of selected PRA-regulated deposit-takers which provides thematic feedback from the PRA’s review of written auditor reports received in 2025 covering IFRS 9 expected credit loss accounting (ECL) and accounting for climate risk.