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The EBA’s draft Guidelines on loan origination and monitoring (the Guidelines) are the new standard for credit underwriting in Europe. 

KPMG ECB Office published a paper on the Guidelines which outlines what banks should do to prepare adequately for their implementation. 

Click here to read our report.

These Guidelines have the objective to improve the overall credit risk management practices in Europe and to ensure more robust, prudent and uniform lending standards between banks and EU jurisdictions. The Guidelines are expected to be available in final form in January 2020, and implemented by banks from 30 June 2020. 

A reinforced regulatory focus for credit underwriting

Prior to these Guidelines, most Irish Significant Institutions (SIs) have already been subject to some degree of supervisory scrutiny on the quality of their credit risk management practices. While the underlining principles were aligned with the EBA’s requirements, the regulatory expectations are now formalised and extensively detailed within the Guidelines. This greatly reinforce the regulatory focus on the topic and the importance of compliance. 

The Guidelines also apply to all regulated credit institutions. We therefore anticipate that Irish banks of all sizes will be impacted (or at least to explain and substantiate any areas of non-compliance). 

  • For SIs, the ECB has already stated in its Supervisory Priorities for 2020 that it will “continue to assess the quality of banks’ underwriting criteria”, and “depending on the findings, bank-specific actions may be considered.” The ECB also stated that, “the quality of specific asset class exposures will be examined through dedicated on-site inspections in areas such as commercial real estate, residential real estate and leveraged finance.” 
  •  In order to ensure compliance of the Less Significant Institutions (LSIs), we anticipate that the Central Bank of Ireland will follow a similar approach, taking into consideration the concept of proportionality. 

What should banks do to prepare?

It is important that credit institutions are in a position to  evidence compliance, and it is strongly recommended that  a gap analysis between the requirements of the Guidelines and current practices is undertaken. This will support interactions with the regulator and assist in addressing any deficiencies.

KPMG Ireland has extensive credit risk management and regulatory experienced and can support banks with performing a regulatory gap analysis (using our proprietary tool).

Please contact us for any question or visit our KPMG ECB Office website for further information.