UK PRA issues Dear CFO letter on IFRS 9 expected credit losses

The UK Prudential Regulation Authority (PRA) has published a Dear CFO letter to selected deposit-takers providing thematic feedback from its review of written reports from auditors of UK-headquartered banks and building societies. The PRA's focus this year was accounting for IFRS 9 expected credit losses (ECL) and climate risk. The review highlighted several key findings: (i) model risk remains elevated in light of persistent macroeconomic and geopolitical uncertainty, with current credit risk factors differing from those that existing models were built to capture. The PRA emphasises the need for firms to critically assess the responsiveness of their modelling frameworks and the completeness of post-model adjustments; (ii) firms are making progress on multi-year model redevelopment plans to address longstanding limitations. The PRA encourages firms to ensure that investment is appropriately targeted to better capture risk, and that it is supported by strong governance and controls; (iii) the risk of historical bias in Loss Given Default (LGD) estimates continues, and so the PRA urges firms to strengthen their processes to challenge the realism of recovery assumptions, particularly underpinning LGD for vulnerable sectors and borrowers; and (iv) regarding climate risks, the PRA acknowledges improvements in firms' capabilities to incorporate climate-related factors into ECL modelling, despite ongoing data limitations, and encourages further efforts to align with existing supervisory expectations, including those set out in its recent consultation.

To help firms identify areas of improvement, the annex to the letter sets out the PRA's narrowed areas of focus, particularly in relation to the timely capture of changes in credit risk. For its 2026 analysis, the PRA has requested auditors to provide their views on firms' progress in these areas, and plan to assess the quality of ECL processes, including data aggregation and the impact of securitisation. Firms are encouraged to conduct their own assessments and share them with auditors.

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