EBA Guidelines on Loan Origination and Monitoring

Standardisation of existing approaches

The new guidelines include a set of requirements that should largely exist in banks with mature and sophisticated approaches to credit granting and risk management. In short, there is nothing – in principle – that banks shouldn’t already be doing. Notwithstanding this, the guidelines standardise such requirements and create a yardstick to be measured against.

Akin to BCBS 239

These guidelines are both enterprise wide and interdependent. Much like with the introduction of BCBS 239, which largely codifies actions and processes that banks should have in place in any case, changes tend to have impacts on dependent or reliant areas (e.g. IT systems on credit processes). That being said, like BCBS 239, the detailed requirements have meant cross-organisational initiatives are required to ensure all existing, and any future activities mean that compliance can be assured.

Back book versus front book

In our view, the most significant challenge for banks will be implementing the back book requirements called out in the guidelines. In particular, the commercial difficulty of gathering retrospective data and information for aged loans will require pragmatic and business led solutions, supported by risk expertise and insights.

Front line implementation

It is likely that regulatory authorities will expect that the implementation of these guidelines will best be delivered - from strategic, risk management and 3LOD perspectives – by the front line, in conjunction with input from the second line of defence functions. It is also our view that such projects typically are more successful when the business units lead, with greater buy-in, input and ultimately delivery.

Introduction:

• On 29 May 2020, the European Banking Authority (EBA) published its final report on the Guidelines on Loan Origination and Monitoring (the Guidelines).
• The Guidelines specify the internal governance arrangements for Banks in relation to the approval and monitoring of credit facilities.
• The primary objective of the Guidelines is to prevent performing loans from becoming non-performing loans (NPL) in the future by requiring Banks to have robust loan origination standards in place.
• The Guidelines align with the EBA's supervisory priorities for 2020 by prioritising balance sheet repair and preventing a build-up of future NPLs.
• Banks should therefore ensure they conduct an end-to-end review of their lending processes and capabilities and commence the required process enhancements and implementation in line with the timelines required.

Expectations and next steps:

• The EBA has outlined a three phased approach so that Banks can focus and assess their operational priorities.
• The EBA guidelines will have a major impact on Banks’ credit frameworks and will require significant resourcing efforts to implement, therefore Banks must act now to ensure compliance with the enhanced loan origination and monitoring requirements.
• Banks should conduct a detailed gap analysis and commence a programme to streamline their lending processes, and enhance their capabilities (including data and technology systems) to deliver on the requirements.