Featured Product

    PRA Provides Feedback on Expected Credit Loss Accounting Under IFRS 9

    October 02, 2019

    PRA published a letter from Victoria Saporta to the Chief Financial Officers of selected deposit-takers. The letter provides formal feedback to both firms and auditors from the PRA review of “written auditor reports received in 2019.” The letter sets out key findings of the PRA review, with Annex 1 covering thematic findings on expected credit loss (ECL) accounting under IFRS 9 and Annex 2 covering thematic findings relating to matters other than ECL. The thematic findings do not identify any particular firm or auditor.

    The letter noted that firms continue to evolve their ECL methodologies, enhance their models, and develop the control and governance structures surrounding the models. It is against that background that PRA set out the following main thematic findings:

    • Controls around new ECL models and data—A pervasive issue continues to be weaknesses in aspects of firms’ controls and management information around new ECL models. Significant progress has been made in embedding end-to-end controls around economic data and forecasts, but further progress is needed. Auditors also commented on the adequacy of information available to management to enable the effective oversight of complex ECL models. PRA expects firms to continue to enhance their business-as-usual processes around ECL and upstream data sources.
    • Model adjustments—The issue above means greater reliance is being placed on governance to identify implausible model outputs and to raise sufficient in-model adjustments, post-core model adjustments, and overlays (hereafter, together referred to as PMAs) to capture the risks and uncertainties that models missed. In 2018, progress was made in implementing model changes that will reduce the number of PMAs; however, it was noted that limited progress has been made in reducing reliance on PMAs to compensate. PRA expects firms to continue to develop and implement plans to better incorporate risks into core ECL models and to address data limitations.
    • Economic scenarios—Most firms raised PMAs to attempt to compensate for gaps in how their core models consider multiple economic scenarios. These PMAs captured additional low probability, high-impact scenarios related to the country or portfolio specific shocks. PRA is keen to see the ECL methodologies evolve in the way which these methodologies consider multiple economic scenarios so that core models no longer have these gaps and have reduced reliance on material PMAs.
    • Consistency—Differences (between firms and across portfolios) will exist in the approaches to the key judgement of determining whether a significant increase in credit risk (SICR) has occurred. Some progress has been made in developing metrics to monitor the sensitivity and effectiveness of different SICR approaches; moreover, there is agreement that it is important to have good metrics. However, further progress is needed to ensure that the metrics are adopted more widely and become the industry standard. PRA is talking to the major UK-headquartered banks and building societies about steps that could be taken to bring greater consistency in the application of ECL accounting under IFRS 9.

    PRA has decided that it will be helpful to set out its views on practices that would contribute to a high-quality and more consistent implementation of ECL. These practices have been described in the annexes to the letter and developed using the written auditor reporting work. These practices were shared with auditors in August 2019 and, before then, a similar list was shared with the auditors in September 2018. As part of the next round of written auditor reporting questions for the 2019 year-end audit, PRA has asked for the views of autditors on the extent to which a firm has adopted these practices or has alternative processes in place to achieve the same results. PRA intends to discuss wider adoption of these practices with firms in 2020, as part of the continuing work with firms on consistent application of ECL accounting under IFRS 9.

     

    Related Link: Letter

     

    Keywords: Europe, UK, Banking, IFRS 9, ECL, Financial Instruments, Credit Risk, SICR, PRA

    Featured Experts
    Related Articles
    News

    MAS Amends Notice 610 on Reporting Templates for Banks in Singapore

    MAS published amendments to Notices 610 and 1003 related to submission of statistics and returns, along with the reporting templates and frequently asked questions (FAQs) associated with these Notices.

    January 24, 2020 WebPage Regulatory News
    News

    HKMA Updates Policy Module on Supervisory Review Process

    HKMA is issuing, by notice in the Gazette, revised versions of two Supervisory Policy Manual modules as statutory guidelines under section 7(3) of the Banking Ordinance. The Supervisory Policy Manual modules are CA-G-5 on “Supervisory Review Process” and SB-2 on “Leveraged Foreign Exchange Trading.”

    January 24, 2020 WebPage Regulatory News
    News

    PRA Amends Pillar 2 Capital Framework for Banks

    PRA published the policy statement PS2/20 that contains the final amendments to the Pillar 2 framework and provides feedback to responses to the consultation paper CP5/19 on updates related to Pillar 2 capital framework.

    January 23, 2020 WebPage Regulatory News
    News

    FED Proposes to Revise Information Collection Under Market Risk Rule

    FED proposed to revise and extend, for three years, FR 4201, which is the information collection under the market risk capital rule.

    January 22, 2020 WebPage Regulatory News
    News

    HKMA Consults on Stay Rules on Financial Contracts Under FIRO

    HKMA published proposals for making rules related to contractual stays on termination rights in financial contracts for authorized institutions under FIRO or the Financial Institutions (Resolution) Ordinance (Cap. 628).

    January 22, 2020 WebPage Regulatory News
    News

    MAS Amends Notices on Minimum Liquid Asset Requirements for Banks

    MAS published amendments to Notices 1015, 613, and 649 related to the minimum liquid assets (MLA) requirements.

    January 21, 2020 WebPage Regulatory News
    News

    APRA Publishes Submission on Fintech and Regtech

    APRA published its submission, to the Senate Select Committee, on financial technology and regulatory technology.

    January 21, 2020 WebPage Regulatory News
    News

    OSFI to Implement Operational Risk Capital Rules for Banks in Q1 2022

    OSFI decided to move domestic implementation of the revised Basel III operational risk capital requirements from the first quarter of 2021 to the first quarter of 2022.

    January 20, 2020 WebPage Regulatory News
    News

    ECB Consults on Guideline on Threshold for Credit Obligations Past Due

    ECB published a draft guideline, along with the frequently asked questions (FAQs), on the definition of the materiality threshold for credit obligations past due for less significant institutions.

    January 20, 2020 WebPage Regulatory News
    News

    OSFI Consults on Instruction Guide for Termination of Pension Plan

    OSFI is consulting on draft revisions to the instruction guide for termination of a defined benefit pension plan.

    January 20, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 4535