On 30 September 2025, the Prudential Regulation Authority (PRA) issued a Dear Chief Financial Officer Letter to selected PRA-regulated deposit-takers providing thematic feedback from the PRA’s review of written auditor reports received in 2025 covering IFRS 9 expected credit loss accounting (ECL) and accounting for climate risk.
The PRA’s focus this year remains on the importance of recognising changes in credit risk in a timely way in a dynamic and challenging environment, and enhancing capabilities to quantify the impact of climate-related risks.
The PRA’s thematic feedback includes:
- Model risk: Model risk remains elevated amidst the ongoing macroeconomic and geopolitical uncertainty. It remains crucial that firms challenge the responsiveness of their processes to evolving risks, and the completeness of post model adjustments.
- Model development: Firms continue to make progress on multi-year plans to enhance or replace models with longstanding limitations. Firms are encouraged to monitor model redevelopment plans to ensure that investment is targeted at better capturing risk and that end-to-end governance and controls align with supervisory expectations for model risk management.
- Recovery assumptions: There continues to be risk of historical bias in Loss Given Default (LGD) and firms are encouraged to enhance processes to challenge the realism of recovery assumptions underpinning LGD for potentially vulnerable sectors or borrowers.
- Climate risks: Firms are encouraged to continue their efforts to enhance how they identify, assess and model climate risk drivers that could affect ECL, which align with the PRA’s existing supervisory expectations. The PRA has consulted on updated supervisory expectations, which it expects firms to take into account once finalised.