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IFRS 9 | PRA IFRS 9 Thematic Feedback 2022-23

Each year the statutory auditor for each of the UK’s “Category 1” banks is required to respond to a range of questions from the PRA relating to various accounting practices, usually with a focus on IFRS 9 loan loss reserving. This is under SS1/16, Written reports by external auditors to the PRA, which has just been reaffirmed and refined after a recent evaluation. The PRA collates and considers the auditors’ reports and then issues thematic feedback highlighting the key priorities for firms over the following year and into the medium-term where they expect improvement in lenders’ practices. While not directly applicable to other firms, the letters, along with the Taskforce on Disclosures about ECL (DECL) publications, are an excellent guide to best practice in IFRS 9 loan loss reserving and disclosure.

The main ECL-related themes have been broadly consistent over time, albeit with some slight variation year-on-year reflecting prevailing market circumstances at the time. For example, the definition of “lifetime” has not featured since 2019-20, while climate considerations related to IFRS 9 have been a standing feature since 2021-22. The PRA has also signalled that multiple economic scenarios and significant increase in credit risk (SICR) are unlikely to feature in the 2023-24 round, mainly owing to work done by the largest banks on these topics in the BoE-sponsored ECL Consistency Working Group (referenced in paras 32 and 35 of the document). Table 1 below shows how different themes have ebbed and flowed through the document in recent years.

Table 1: Main areas of concern over recent years

Main themes of the 2022-23 report

The letter covers five main themes with regards to IFRS 9: model risk; recovery strategies; economic scenarios; SICR; and climate.

1. Model risk: in the PRA’s view, model risk remains elevated in an environment of high inflation and high interest rates. Both pose significant challenges to models’ suitability at a time when firms are also facing challenges in the identification of vulnerable sectors and borrowers. The PRA is focused on the completeness of PMAs to ensure provision cover reflects actual expectations of credit losses. They encourage firms to move to more granular, well-supported PMAs and to continue to address long-standing model limitations. These areas of focus also align with the expectations outlined in SS1/23 on model risk management for banks.

2. Recovery strategies: like model risk, the PRA notes that the recent credit environment is unusual, and that recent default experience is limited. Given higher inflation and interest rates, they note that past recovery outcomes may not necessarily be a good predictor of future recovery rates and that firms should be challenging realism in the recovery assumptions that drive loss given default (LGD).

3. Economic scenarios: the PRA recognises that the impact of high inflation and interest rates will be different across different sectors and segments. They consider economic scenarios to be an effective tool to explore the vulnerabilities in specific areas and are encouraging firms to consider additional, more “severe but plausible” scenarios that account for shocks in such “hot spots”.

4. SICR: the PRA also notes that firms continue to consider SICR differently and are looking for larger banks to continue to bring greater consistency to their SICR approaches and controls. Additionally, they see opportunities for firms to improve the linkages between the application of PMAs and collective SICR assessments to ensure that the risk factors driving the use of PMAs are also considered for staging.

5. Climate and ECL: the PRA notes the improvements made by lenders, but describes wide variations in practice. They see scope for firms to consider a broader range of climate-related risk drivers relevant to their portfolios, with a need for continued follow-on work around data quality and consideration for the impact of refinancing risk.

With regard to climate, this piece covers the aspects that relate to loan loss reserving, but the PRA also considers other elements, including governance and financial reporting risk assessments, controls to support the use of a higher volume of forward-looking climate-related data in financial reporting and capabilities to quantify the impact of climate risks on balance sheets and financial performance. There is also a short annex on mark-to-model fair values.

These themes have been key talking points over the last few quarters, and the macro outlook, as well as the PRA’s feedback here, both reaffirm their importance.

PRA areas of focus for 2024 and the medium-term

The key areas of focus for firms over 2024 and new areas of focus for the medium-term are listed below. Those for 2024 highlight practices that the PRA view to be a priority.

ThemesAreas of focus for 2024
Model risk
  • Challenge whether models capture risks associated with affordability, including the impact of higher inflation and interest rates, and the longer-term refinance risk of fixed-term loans expiring in the years ahead.
  • Enhance the quantification of PMAs to capture risks associated with higher inflation and interest rates by moving away from approximate approaches, like portfolio-level scalars.
  • Establish strategic redevelopment plans and subject them to oversight to ensure capabilities are enhanced to better capture risk and reduce reliance on material PMAs.
Recovery strategies
  • Closely monitor the assumptions made around forward-looking recovery strategies to ensure foreseeable changes are detected early and fed into ECL calculations.
  • Enhance internal reporting to provide greater insights into loans or segments with the highest sensitivity to changes in recovery strategy, which are used to help inform the targeted use of PMAs.
  • Challenge the robustness of collective assessments, including ensuring that risk factors that drive the use of PMAs are considered for staging purposes.
Climate and ECL
  • Check completeness of climate-related risk drivers used to identify potential ECL impacts and portfolios most at risk, including consideration of refinancing risk.
  • Check completeness of overlays that address the risk that loan losses may exceed those predicted by current models.
  • Enhance analytical tools used to ensure conclusions on need for PMAs, to capture the impact of climate risks. Also ensure they are supported by robust, data-driven quantitative analysis – and less reliant on qualitative risk assessments.
  • Undertake more granular portfolio level assessments to consider the impact on probability of default (PD), LGD and exposure at default (EAD) and explore sector- or product-specific vulnerabilities to climate risks.
  • Further embed the impact of climate risks into business-as-usual credit risk assessments for corporate exposures.
  • Ensure business as usual credit risk assessments are subjected to appropriate levels of challenge and used to better understand firms’ aggregate exposure to climate risks.
ThemesNew Areas of focus for the medium-term
Model risk
  • As more recent loss experience becomes available, we see scope for firms to perform more frequent and detailed model back-testing across a broader set of models and segments, on both a pre- and post-PMAs basis.
  • Extend model monitoring and validation to cover all material components of ECL, and ensure model testing is sufficiently granular to identify model performance issues for specific segments, supporting more pro-active model risk mitigation.
  • Enhance both the documentation and testing of key model limitations, including the use of sensitivity analysis as part of ongoing model validation. Firms can use this to both reassess the impact of using different modelling assumptions and to challenge the completeness of their PMAs.
  • Enhance and formalise frameworks to monitor the increased risk of using ‘out-of-boundary’ models calibrated on a sample data range that isn’t reflective of the economic scenarios used to calculate ECL.
Recovery strategies
  • As more recent loss experience becomes available, we see further scope for firms to formalise periodic validation and monitoring of their LGD models.
  • For portfolios where loss experience is insufficient to support meaningful validation and monitoring, we also see scope for firms to establish processes for tracking and challenging key LGD metrics to ensure modelled ECL reflects recent trends.
Economic scenarios
  • As part of ongoing model redevelopment, investigate the relevance of building interest rates and inflation into models where they are currently omitted, as more data emerges concerning the link between credit loss, interest rates and inflation.
  • Build capabilities to perform more comprehensive economic sensitivity analysis more quickly and across more portfolios, and embed greater use of sensitivity analysis as part of business-as-usual governance.
  • Formalise and further enhance use of benchmarking data as part of control frameworks, including more clearly defining thresholds for follow-up actions.
  • Embed clear monitoring thresholds and escalation processes when those thresholds are breached. These should be based on a sound understanding of the expected level for the metrics being used.
Climate and ECL
  • Identify the requirements for data and models and implement the changes necessary to factor climate-related risk drivers into loan-level ECL estimates.
  • Identify how economic scenarios and weightings used for ECL calculations should be adapted to incorporate climate-related risk drivers.
  • Enhance review and monitoring by second-line risk teams concerning how models and scenarios used to calculate ECL incorporate climate-related risk drivers


As we approach the 2024 year-end, credit portfolios continue to weather the inflation and interest rate storm. Amongst all the uncertainty there are two elements that are likely to persist: an increasing focus on model risk and the use of PMAs to mitigate model weaknesses to capture all risks posed by the current macroeconomic outlook.

The points raised in the PRA’s letter require action from “Category 1” banks and, in combination with prior years’ letters are a great guide to high-quality practices for the management of ECL for all other lenders.

The team at Deloitte are available to help you take action to strengthen practices to meet the regulator’s expectations as set out in this and previous years’ thematic feedback letters. We would invite you to read our previous blogs on the topic and to contact any of the authors or co-authors listed below if you would like to discuss any of the themes discussed here.