EBA final Guidelines loan origination and monitoring - KPMG ...

The EBA's Guidelines on Loan Origination and Monitoring, a key response to the European Council's Action Plan on non-performing loans, represent ... close Sharewithyourfriends KPMGPersonalization GetthelatestKPMGthoughtleadershipdirectlytoyourindividualpersonalizeddashboard Registernow Login EBAfinalGuidelinesloanoriginationandmonitoring EBAfinalGuidelinesloanoriginationandmonitoring EBAfinalGuidelinesloanoriginationandmonitoring Whatshouldbanksbedoingnow? Whatshouldbanksbedoingnow? Share 1000 Save Gotobottomofpage Share close Home › Insights › EBAfinalGuidelinesloanoriginationandmonitoring TheEBA’sfinalGuidelinesonLoanOriginationandMonitoringaddresssomeofbanks’concerns–butincludesomeadditionalrequirements.Overall,thisremainsaverydemandingsetofregulationswithhugeimplicationsfordatamanagement,lendingstrategiesandclientrelationships.Banksshouldrespondquickly. TheEBA’sGuidelinesonLoanOriginationandMonitoring,akeyresponsetotheEuropeanCouncil’sActionPlanonnon-performingloans,representthenewstandardforloansandadvancesinEurope.TheGuidelinesaimtoimprovelendingprocessesandpractices,limitNPLinflowsandensurefairconsumertreatment.TheirultimategoalistoenhancethestabilityandresilienceofEuropeanbanks.  ThefivechaptersoftheGuidelinesare: Internalgovernanceforcreditgrantingandmonitoring:whichincludesthefundamentalframeworkforcreditactivitiesanddefinesthecontentofcreditriskpoliciesandprocedures. Loanoriginationprocedures:thecorechapteroftheGuidelines,whichfocusesonkeyaspectsofassessingdifferenttypesofborrowers. Pricing:whichdetailstheneedtosetupacomprehensivepricingframework. Valuationofimmovableandmovableproperty:whichfocusesonthehandlingofcollateralvaluation. Monitoringframework:whichspecifieskeyrequirementsforcreditmonitoringmeasuresandprocedures. TherequirementsandexpectationscontainedintheGuidelinescallforbankstore-engineertheirlendingprocesses,buildingstrongcapabilitiesfromthepointoforiginationtomonitoringthroughouttheloanlifecycle. ItisalsoimportanttonotethattheGuidelinesareaddressedtoEuropeancompetentauthoritiesandfinancialinstitutions,andareapplicableonindividual,sub-consolidatedandconsolidatedbases.ThismeansthatsubsidiariesofEuropeanbankslocatedoutsidetheEUmayalsoneedtomeetsomeoftherequirementsincludedinthenewstandards. ThefinalGuidelineswerepublishedon29May2020.Thiswasseveralmonthslaterthanplanned,butthatdoesnotdenotealackofconcern.Ifanything,theeconomicdownturncausedbyCOVID-19makesassetqualityofthecreditportfoliosagreaterprioritythanever.Instead,thedelayreflectsthevarietyofrequirementsandthevolumeofconsultationcommentsreceivedfromtheindustry. TheEBAhasrevisedtheGuidelinesbyintroducingnewapplicationdeadlinesandtransitionalarrangementsoverathree-yearperiod,startingfrom30June2021(seefigure1). Figure1–EffectiveapplicationdatesforthefinalGuidelines Date Application 30June2021 Applicationdatefornewlyoriginationloansandadvances; 30June2022 Applicationdateforexistingloansandadvances(grantedbefore30June2021)andadvancesthatrequirerenegotiationorcontractualchanges;and 30June2024 Forloansissuedbefore30June2021,missingdataandinformationcanbegathereduntil30June2024.Therequirementsforthemonitoringofthestockofexistingloansshouldbefullyapplicablebythisdatealso. ThefinalGuidelinesalsocontainclarificationsinanumberofareasthatgeneratedastrongresponseduringtheconsultationperiod,including: Onproportionality:Dividing‘professional’borrowersinto‘microandsmallenterprises’and‘medium-sizedandlargeenterprises’,withspecificrequirementsforloanoriginationproceduresineachcategory;andincreasingflexibilityaroundthesophisticationofvaluationandmonitoringrequirements. Onprescriptiveness:Reducingtheuseofthewording‘atleast’andmakingitclearerthattheGuidelines’annexesrepresentbestpractices,notminimumexpectations. Onterminology:AligningseveraldefinitionswiththoseinotherEuropeanandnationalregulations. Setagainstthat,theEBAhasmadesomechangesthatwillrequiresomeadditionaleffortfrombanks.EvenlenderswhichhavealreadyadjustedtheirloanproceduresinrecentyearsshouldnotethatthefinalGuidelines: AddseveralrequirementstoincorporateESGfactorsandassociatedrisks-intocreditriskpoliciesandprocedures,valuationsandcreditworthinessassessments. Requireinstitutionstoimplementdifferentiatedpricingframeworksfordifferenttypesofloansandborrowers. Includeadditionalmonitoringrequirements:a)forinstitutionsengagedinsyndicatingleveragedtransactions;andb)forconsideringqualitativefactors–aswellasfinancialandcreditmetrics-whengaugingloanrepaymentprospects. Inshort,thechangesannouncedinMay2020donotalterthefactthatthisdetailednewsetofregulationswillhavefar-reachingimplicationsforlenders(seeFigure2).TheGuidelines’forwardlooking,pro-activeapproachandemphasisonmonitoringcreditqualitythroughoutthelifecycleofaloanwillhaveamajorimpactonhowbanks’data,technology,methodology,people,governanceandprocessesareorganised.Intime,theywillalsohaveatangibleeffectonclientrelationshipsandcommerciallendingpractices. Figure2–ExpectedareasofimpactatEuropeanlevel Source:KPMGassessment Thepracticalchallengesforbankswillarguablybegreatestinrelationtochangemanagement,understandingthemethodologiestobeapplied,theaggregationandreconciliationofcreditdata,andmetricscalculation. Forexample,theGuidelinesrequirelendersto:  Establishadatainfrastructurethatallowsforcontinuouscapturingandmonitoringofdatacurrentlystoredonavarietyofdatabases,incontractsandonpaper. Maintainarobust,transparentcreditdecision-makingprocesswithfulldatasharingbetweenfrontlinedecisionmakers,secondlinefunctionssuchasriskandfinance,andmanagementbodies. Developagoodunderstandingofwhichbusinesseswillbemostaffected,asabasisforprioritisingchangeprogrammes. Setupcomprehensiveprojectplanstosharewithdifferententities,departmentsandbusinesslines. Developadata-drivenpricingframeworkwithportfolio-basedapproachesforconsumers,microandsmallenterprises,andmediumorlargeenterprises. IncorporatetherequirementsoftheGuidelinesintopolicies,riskmanagementpractices,trainingandincentives,andtoregularlyassesshowtheyarebeingappliedbystaff. Takingthisintoaccount,webelievethatcreditdepartmentsshouldconsiderfocusingonthekeyareasbelow,iftheyhavenotdonesoalready. Addressingshortcomingsandfindingsfromthepast(forexample,viaagap-remedyprogrammetoaddressOSIfindingsoncreditunderwriting). Levelling-upefficiencyby: Streamliningloanoriginationprocedures; Reducingmanualworkloadbyproducingregularmonitoring(automatedreports); Reconsideringwhichpropertycollateralwillmitigatecreditriskinthetimeliestandmostcost-efficientway;and Settingupanintegratedworkflowintechnologysystemsoverthecreditlifecycle. Securingbudgetfortechnologyprojects;and Addressinganyresourceshortageswithincreditdepartmentsandriskfunctions. Furthermore,it’snotonlytheEBAthatisstrengtheningitsapproach.Lastyear,theECBidentifiedthequalityofcreditunderwritingasasupervisorypriorityforanotheryearrunning.Also,intheECB’slatestreporton10June2020,theydetailthefindingsfromthecreditunderwritingexercisein2019whichreinforcestheincreasinglyforward-lookingapproachtocreditsupervision.TheECBfurtherplantoconductamoredetailedanalysisofpotentialpocketsofrisk,withaparticularfocusonthequalityofassetsinareassuchascommercialrealestate,residentialrealestateandleveragedfinance.Thiswillbeexaminedthroughon-siteinspectionsandfollow-upactionsinthefuture. Inconclusion,thescopeofthefinalGuidelinesmeanthatbanksneedtomovequicklytodesignchangeprogrammes,buildteams,engagewithsupervisorsandbeginimplementation.TheyshouldalsoidentifyanyoverlapswiththeECB’sagendaorrelatedprojectssuchasDefinitionofDefault,IRBrepairprogrammeandNPEregulation. Thiscallsforarobust,coordinatedprojectplan,beginningwithacomprehensivegapandimpactassessment.KPMGmemberfirmshaveextensiveexperienceofsupportingbanksthroughthisprocess,drawingontheinsightsandresourcesoftheECBOfficeandexpertisefromKPMG’sinternationalnetwork. Dr.HenningDankenbring Partner,HeadofKPMGECBOffice KPMGinGermany EmailDr.HenningDankenbring AllanFolly-Darlis SeniorManager,FinancialRiskManagement KPMGinBelgium EmailAllanFolly-Darlis Stayuptodatewithwhatmatterstoyou Gainaccesstopersonalizedcontentbasedonyourinterestsbysigninguptoday Signuptoday Welcome  Browsearticles, setupyourinterests,or Learnmore. 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