In line with the 2019 EU regulatory priorities for credit risk, the EU regulators have considerably increased their focus towards enhancing the robustness of credit underwriting practices in Europe. The aim is to improve credit quality and prevent new flows of non-performing exposures (NPEs) in the European banking system, in order to avoid similar issues as faced in the previous crisis.
New measures recently introduced:
The EBA has developed these Guidelines in response to the European Council Action Plan (PDF, 463KB) on tackling the high level of non-performing exposures.
The objective of the Guidelines is to:
1) Improve institutions’ practices and associated governance arrangements, processes and mechanisms in relation to credit granting.
2) Build on statutory objectives to include both prudential and financial stability as well as consumer protection and to ensure that the institutions’ practices are aligned with consumer protection rules and respect fair treatment of consumers.
3) Ensure that institutions have in place prudential loan origination standards in order to prevent newly originated performing loans from becoming non-performing in the future.
Content of the guidelines
The Guidelines cover a broad range of topics from the granting of the credit to the subsequent monitoring. These topics include: internal governance and control framework; loan origination (including data and information requirements); risk-based pricing; approaches to valuation (immovable and movable collaterals); and ongoing monitoring.
Claify internal governance and control framework for credit granting and credit decision making-process.
5. Loan origination
Set out requirements for information and data collection from borrowers, documentation, and requirements for the borrowers' creditworthiness assessment for loan originated after the application date or where terms are renegotiated or requires specific actions triggered by the regular credit review after the application date.
Set out supervisory expectations for the risk-based pricing of loans.
Provide guidance on the approaches to the valuation of immovable and movable property collateral at the point of credit granting, monitoring and review of the value of such collateral.
Specify the ongoing monitoring of credit risk and credit exposures, including regular credit reviews of professional borrowers.
Internal governance and control:
Credit risk policies and procedures:
Credit risk monitoring framework:
Stress testing in monitoring process:
Credit institutions in Europe are advised to start looking closely at the implications of this increased regulatory focus on quality of credit underwriting, as this is expected to have important implications for institutions of all sizes. This also has to be considered in the broader context of the “end-to-end” credit lifecycle, as the regulators are now moving away from NPL firefight towards expecting banks to have well embedded and integrated governance, processes and control mechanisms from the loan origination stage up to the resolution of distressed exposures.
A first recommended step is to perform a gap analysis of the practices in place in the institution compared to the new EBA Guidelines, to identify potential gaps and pitfall to develop remediation plans and better prepare interactions with the regulator.
KPMG has extensive credit management and regulatory experienced and can support banks with performing regulatory gap analysis, developing remediation plans and supporting implementation of change programs. Please do not hesitate to contact us, via this form, for any question and/or if you require any support to navigate these changes.