Post-model adjustments: governance and release

Supervisors and auditors have focused closely on post-model adjustments since the pandemic, especially those that stay on the balance sheet for years after the reason for them has faded. This guide sets out a governance framework for post-model adjustments, shows what a register looks like, and explains how and when they should be released.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Post-model adjustments to ECL need a governance framework because they rely on judgement and can move profit significantly. Good practice is a documented life cycle: identify a specific risk the model does not capture, quantify it with data and a repeatable method, have it approved by a credit or impairment committee with a named owner, monitor it at each reporting date, and release it when the model captures the risk or the risk passes. Each adjustment is kept in a register, disclosed when material, and tested by auditors.

At a glance

Life cycle
Identify, quantify, approve, monitor, release
Record
An overlay register
Approval
Credit or impairment committee
Ownership
A named owner for each
Release trigger
Defined at the outset
Tested by
Auditors and supervisors
Post-model adjustments: governance and releaseLife cycle: Identify, quantify, approve, monitor, release; Record: An overlay register; Approval: Credit or impairment committee; Ownership: A named owner for each; Release trigger: Defined at the outset; Tested by: Auditors and supervisors.KEY FACTS AT A GLANCEPost-model adjustments: governance and releaseLife cycleIdentify, quantify,approve, monitor, releaseRecordAn overlay registerApprovalCredit or impairmentcommitteeOwnershipA named owner for eachRelease triggerDefined at the outsetTested byAuditors and supervisorsTax BakersPost-model adjustments: governance and releaseLife cycle: Identify, quantify, approve, monitor, release; Record: An overlay register; Approval: Credit or impairment committee; Ownership: A named owner for each; Release trigger: Defined at the outset; Tested by: Auditors and supervisors.KEY FACTS AT A GLANCEPost-model adjustments: governanceand releaseLife cycleIdentify, quantify, approve, monitor,releaseRecordAn overlay registerApprovalCredit or impairment committeeOwnershipA named owner for eachRelease triggerDefined at the outsetTested byAuditors and supervisorsTax Bakers
Key facts at a glance, as set out in this guide.

The life cycle of post-model adjustments

The life cycle of a post-model adjustmentThe life cycle of a post-model adjustment1IdentifyA risk themodel misses2QuantifyWith data anda method3ApproveBy committee,with an owner4MonitorEach reportingdate5ReleaseWhen capturedor passed
The release trigger is agreed when the adjustment is made.
  1. Identify: a specific risk or limitation, such as a segment the model cannot see, with evidence that it affects expected losses.
  2. Quantify: using data and a method that can be repeated, such as a stressed model run, recent default trends or a benchmark.
  3. Approve: by the committee that owns the ECL estimate, with challenge from risk and finance, and a named owner.
  4. Monitor: recalculate and reassess at each reporting date; overlays should not be carried forward unchanged by default.
  5. Release: when the model is updated to capture the risk, when the risk crystallises into defaults the model reflects, or when it passes.

What does an overlay register look like?

OverlayAmountMethodOwnerRelease trigger
Commercial real estate collateral valuesCU 1.2mLGD rerun at current valuationsHead of wholesale credit riskCollateral data refreshed in the LGD model
Unsecured affordabilityCU 0.8mPD uplift from arrears trends of high debt-service borrowersHead of retail credit riskPD model recalibrated with the new arrears data
Duplicate exposuresCU (0.3)mExposure-level reconciliationCredit risk data leadSystem fix deployed

The release trigger is set when the overlay is created. Writing it down at the start is what stops an overlay becoming a permanent, unexplained buffer.

How are post-model adjustments released?

Gradually or in full, as the reason fades. If the risk crystallises, the adjustment is usually replaced by modelled ECL on the assets now in stage 2 or 3, so the total allowance may not fall at all. If the risk passes without losses, the release reduces the allowance and increases profit, and should be explained in the disclosures. Releasing overlays to smooth profit, or holding them because the bank is profitable, is not consistent with IFRS 9.

What do auditors and supervisors expect?

  • A clear link between each adjustment and a specific risk, with evidence and documentation that a reviewer can follow.
  • A quantification method that is reasonable, documented and applied consistently.
  • Evidence of challenge and approval, and that adjustments are refreshed each period.
  • Plans to bring long-standing adjustments into the models, with model risk managed through the normal model governance process.
  • Disclosure of material adjustments and their movements.

How do post-model adjustments interact with staging?

An adjustment can change the allowance without moving any loan between stages, which makes the stage disclosures harder to interpret. Many lenders therefore apply sector or affordability overlays by moving the affected loans to stage 2 and measuring lifetime ECL, so the adjustment shows up in the staging tables as well as in the total.

What does a good disclosure look like?

A table listing each material adjustment, its amount at both reporting dates, a sentence on the risk it covers and how it was measured, and the reason for any change or release. Readers should be able to see how much of the allowance comes from judgement rather than models.

How large should adjustments be?

There is no limit, but large or long-lasting post-model adjustments suggest models need updating. A growing share of the allowance coming from adjustments is a warning sign that auditors and supervisors look for; the aim is to absorb them into the models over time.

Where to go next

See management overlays in ECL for the types of overlay and how they are sized, and ECL stages explained.

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Questions people ask

What are post-model adjustments in ECL?

Adjustments to modelled expected credit losses for risks the model does not capture, also called management overlays.

How should post-model adjustments be governed?

Through a documented life cycle: identify, quantify, approve with a named owner, monitor each period, and release when the risk is captured or passes.

When should a management overlay be released?

When the model is updated to capture the risk, when the risk crystallises into modelled defaults, or when it passes.

What do auditors look for in post-model adjustments?

A specific risk, evidence, a repeatable method, approval and challenge, regular refresh, plans to absorb it into models, and disclosure.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ECLManagement overlays in ECLECLECL stages 1, 2 and 3 explainedECLHow to calculate ECL, step by step

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This guide is general information. It is not tax or legal advice for your situation.