Featured Product

    PRA Letter Offers Feedback on Implementation of ECL Approach in IFRS 9

    April 18, 2019

    PRA published a letter from Victoria Saporta of PRA, providing formal feedback to firms and auditors on the thematic findings from its written auditor reporting work in relation to the implementation of the expected credit loss (ECL) approach in IFRS 9. Victoria Saporta, the Executive Director of Prudential Policy of PRA, sent this letter to the Chief Financial Officers of selected deposit-takers.

    The letter includes a summary of the thematic findings from the review of the 2017 (or 2017/2018) year-end written auditor reports. The findings on the implementation of the expected credit loss (ECL) approach in IFRS 9 have been set out in detail in the annex to the letter. Implementing ECL has involved a significant effort for firms and this effort is starting to deliver credit risk management benefits, including more granular and forward-looking credit risk assessments. However, as expected, firms are continuing to enhance their models and evolve the control and governance structures surrounding those models. In that context, the following are the key thematic findings from the 2018 PRA review on this:

    • Weaknesses in aspects of firms’ controls and management information around new ECL models was a pervasive issue. PRA expects firms to continue to enhance their business-as-usual processes around ECL and the upstream data sources.
    • The above issue means greater reliance is being placed on governance to identify implausible model outputs and to raise sufficient in-model adjustments and overlays to capture the risks and uncertainties that models had missed. PRA expects firms to develop and implement plans to better incorporate risks into core ECL models and to address data limitations. 
    • Provision cover was higher where realistic but severe downside scenarios had been considered; the cover was lower where the high-impact, low-probability scenarios were missing from firms’ analyses and more weight had been given to base case scenarios. Some firms applied post-model overlays (or post-model adjustments, or PMAs) to attempt to compensate for gaps in their core models. PRA believes that material post-model adjustments should be incorporated in the core model.
    • It is expected that there will be differences (between firms and across portfolios) in approaches in determining whether a significant increase in credit risk (SICR) has occurred. PRA is working with firms on various aspects of the consistent application of IFRS 9 ECL and it expects definitions of SICR and exposure lifetimes to be a part of this work. PRA will also look at the testing firms has done to assess the sensitivity of models to alternative SICR criteria.


    Related Link: Letter

     

    Keywords: Europe, UK, Banking, IFRS 9, ECL, Written Auditor Reporting Work, Thematic Findings, Credit Risk, SICR, PRA

    Featured Experts
    Related Articles
    News

    BIS Innovation Hub Sets Out Work Program for 2021

    BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.

    January 22, 2021 WebPage Regulatory News
    News

    EC Plans to Consult on Crisis Management and EDIS Framework Revisions

    In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.

    January 21, 2021 WebPage Regulatory News
    News

    EBA Finalizes Remuneration Standards for Investment Firms in EU

    EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).

    January 21, 2021 WebPage Regulatory News
    News

    ECA Recommends Actions to Enhance Resolution Planning for Banks

    EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.

    January 20, 2021 WebPage Regulatory News
    News

    BoE Publishes Key Elements of the 2021 Stress Testing for Banks in UK

    BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.

    January 20, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules on Identity Verification of Depositor Protection

    PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).

    January 20, 2021 WebPage Regulatory News
    News

    FSB Publishes Work Program for 2021

    FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.

    January 20, 2021 WebPage Regulatory News
    News

    FCA Issues Update on Move to New Data Collection Platform

    FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.

    January 20, 2021 WebPage Regulatory News
    News

    Bundesbank Publishes Derivation Rules for Reporting by Banks

    Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.

    January 19, 2021 WebPage Regulatory News
    News

    FED Revises Capital Planning and Stress Testing Requirements for Banks

    FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.

    January 19, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6488