Clock Is Ticking – EBA Draft Guideline On Loan Origination And Monitoring

Following this September's public hearing on the draft Guidelines (GL) on loan origination and monitoring (EBA/CP/2019/04) at the European Banking Authority (EBA) headquarters, it is crucial for credit providers - including banks - to start implementing the GL (even before they are finalized) given the tight deadline. Here's all you need to know to be ready in time.

The current draft Guidelines require a detailed assessment of the borrower's repayment capacity. They include the review of the credit granting criteria, data information collection, authentication of the credit decision-making process and the establishment of a credit risk culture tone from the top. They ensure that credit is granted to borrowers who will be able to fulfil the terms and conditions of the credit agreement.

Moreover, they encompass specific requirements in terms of credit quality monitoring, identification of deterioration in the repayment capacity of the borrower (by performing regular assessments based on KRIs, early warning indicators (EWIs), stress testing results and sensitivity analyses), and the ongoing improvement of credit quality assessment procedures and associated risk profiling as a result of new credit granting activities.

The GL will also ensure that originated loans are of high credit quality, helping the EBA to improve the financial stability and resilience of the EU financial system.

The final Guidelines are expected in December 2019 for an application date of 30 June 2020.

Who does it apply to?

Unlike the current draft which makes no distinction between credits proposed by banks or by non-banks, the final GL should apply to all credit providers. Instead, the EBA creates a common level playing field independent of the specific nature of the issuing entity.

A closer look

Scope

Asset classes: SME corporate, commercial & residential real estate, professional, project finance (shipping) Instruments/products: All credit facilities (excluding debt securities), loans and advances Collateral: movable property and immovable property collateral (excluding financial collateral) Priorities

Scope of application: these GL should apply to new lending and also to loans and credit facilities originated before the date of implementation Environmental factors and green lending: ESG factors have been included in the risk management policies, credit risk policies and procedures Valuation of immovable property collateral: use of advanced statistical models for the...