Featured Product

    PRA Letter Offers Feedback on ECL Models, IBOR Reform, and Outsourcing

    October 02, 2020

    PRA published a letter that provides thematic feedback to firms and auditors on topics such as the IFRS 9 expected credit loss (ECL) accounting and the global benchmark reforms. This feedback letter, from Victoria Saporta of PRA, is a result of the review of written auditor reports received in 2020 and the subsequent discussions with firms. The letter briefly sets out the main thematic findings, with Annex 1 providing detailed findings on IFRS 9 ECL accounting and Annex 2 covering findings related to the global benchmark reform, investments in technology, and third-party controls.

    Each year, PRA receives a written report from auditors responding to its questions on issues of particular supervisory interest. PRA provides feedback on those reports through a number of channels, including a letter to the chief financial officers of firms. This letter highlights that significant progress has been made by all firms to enhance the controls and governance around their ECL models and data. As a result of significant efforts made by all firms, many of the high-quality practices, as described in the October 2019 letter, were already in place at the time the reports were written. However, further progress is needed. Against this background, PRA has set out the following key findings:

    • Significant progress was made by firms to enhance controls around ECL models and data. Nevertheless, there were weaknesses in aspects of firms’ controls, consistent with these controls being relatively immature. In addition, weaknesses in the underlying models and data had started to emerge prior to the start of the COVID-19 pandemic, with a number of significant models either failing validation or being rated as "needs improvement." PRA expects firms to consider the adequacy of their resourcing and infrastructure to monitor model performance and react to weaknesses identified, including the adequacy of management information to enable effective oversight of models and post-core model adjustments.
    • PRA noted limited progress in 2019 toward reducing reliance on post-core model adjustments by updating models, with some post-core model adjustments that appear suitable for incorporation into the model being in place longer than 12 months. PRA continues to expect firms to give due priority to the need to reduce reliance on post-core model adjustments when determining their longer term model redevelopment programs.
    • Firms are encouraged to ensure that control and governance frameworks are adapted to cope with the increased reliance on the tactical processes and data. Additionally, the time taken to run the ECL processes from end-to-end leaves little room for sensitivity tools that inform effective challenge around the use of alternative economic assumptions. PRA believes that it is essential for firms to develop the capability to perform more comprehensive economic sensitivity analysis more quickly to inform governance and public disclosures.
    • Firms made progress in enhancing the controls around the validation of a significant increase in credit risk (SICR) criteria. However, firms made relatively few changes to their SICR approaches in 2019. PRA believes that wider use of industry standard metrics are a good first step to benchmarking the effectiveness of different approaches across firms in recognizing SICR in a timely manner. PRA judged firms to have partially adopted the high quality practices related to SICR.
    • With respect to transition from LIBOR to robust alternative reference rates, firms generally appeared to have granular transition plans and robust governance structures in place. Responses indicated an awareness and active management of both current and future risks related to conduct, legal, markets, and operations. However, there are areas where improvements could be made, particularly for firms relying on manual processes to capture and aggregate IBOR exposures; this is because such manual processes increase the risk of error and limit the ability to proactively monitor exposures.
    • PRA noted instances where the risks associated with outsourcing activities to third parties were managed at the process level rather than at the third party level. Centralizing ownership and risk management would assist in ensuring the three lines of defense are appropriately engaged in managing the dependence on third parties and increasing a firm’s operational resilience. Auditors’ reports noted that firms did not always have controls reports for their material outsourcing service providers. Management continues to have a responsibility for ensuring that outsourced processes are the subject of robust and effective controls and one way of achieving this is through controls reports.

     

    Related Link: Letter

     

    Keywords: Europe, UK, Banking, IFRS 9, ECL, COVID-19, Credit Risk, Interest Rate Benchmark, LIBOR, IBOR, Thematic Findings, Outsourcing Arrangements, PRA

    Featured Experts
    Related Articles
    News

    APRA Finalizes Guidance on Management of Climate Change Risks

    The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.

    November 26, 2021 WebPage Regulatory News
    News

    European Council Adopts Position on Digital Finance Package Proposals

    The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).

    November 25, 2021 WebPage Regulatory News
    News

    PRA Proposes Rulebook Changes; BoE Extends BEEDS Testing Window

    The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.

    November 25, 2021 WebPage Regulatory News
    News

    EC Proposes New Measures Under Capital Markets Union Package

    The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.

    November 25, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR

    The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).

    November 24, 2021 WebPage Regulatory News
    News

    FED Outlines Lending Conditions and Supervisory Activities in H1 2021

    The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.

    November 24, 2021 WebPage Regulatory News
    News

    APRA Expects Boards to Strengthen Ability to Oversee Cyber Resilience

    The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.

    November 23, 2021 WebPage Regulatory News
    News

    FSB Updates List of Global Systemically Important Banks

    The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.

    November 23, 2021 WebPage Regulatory News
    News

    FASB Proposes Improvements to Credit Losses Standard

    The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.

    November 23, 2021 WebPage Regulatory News
    News

    US Agencies Issue Statement on Crypto-Asset Policy Initiatives

    US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.

    November 23, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7733