Financial Services Ireland

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European Banking Authority Loan Origination and Monitoring Guidelines

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The European Central Bank have recently announced their priorities for 2021 which set the annual agenda for banking supervision. Responding to Covid-19 remains the top priority for the ECB and as a result, the supervisor has highlighted four key priority areas that it will continue to monitor in the year ahead. This includes, credit risk management, capital strength, business model sustainability and governance.

In relation to credit risk they have signalled the importance of banks having adequate risk management practices in place to identify, measure and mitigate the impact of credit risk, as well as the operational capacity to manage the expected increase in distressed borrowers. It is expected that ECB Banking Supervision will focus its efforts on the adequacy of banks’ credit risk management, operations, monitoring and reporting. It is highly likely the recently finalised EBA Guidelines on Loan Origination & Monitoring will serve as the benchmark.

These Guidelines form part of the response to the European Union’s Action Plan regarding high levels of non-performing exposures witnessed throughout the global financial crisis (GFC), with non-performing loan (NPL) ratios remaining at pre-GFC levels in some countries at present.  The objective of the Guidelines is to:

  • Further improve institutions’ practices and governance to ensure effective management and monitoring throughout the loan cycle;
  • Prepare the banking sector for upcoming challenges within the EU banking sector (for example, Sustainability, Fintech etc.); and
  • Improve profitability by ensuring that newly originated loans are of high credit quality, while respecting and protecting the interests of consumers.

The Guidelines are split over five chapters, setting requirements across governance, loan origination, pricing, collateral valuation and monitoring.

Given the breadth of the requirements they will have wide-reaching consequences for policies, processes and data/IT, particularly in respect of the monitoring requirements framework requirements.

It is also worth noting that the European Central Bank (ECB) continues to strengthen its approach around this topic with a focus on credit underwriting being a supervisory priority for a second year in a row.

To navigate these guidelines, our latest paper – which you can download below – focuses on the context of these Guidelines, our assessment of the key implementation challenges having supported clients on this topic and key success factors for an effective assessment of the Guidelines.

Don’t hesitate to reach out if you have a question.

Mark Brangam

FS Associate Partner, Risk Consulting
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