On June 19th 2019, EBA published a consultative paper on the draft Guidelines on loan origination and monitoring.
The published GL proposal belongs to the package of documents prepared in the framework of the European Council Action Plan, which was adopted in 2017 to reduce the high level of non-performing exposures in the European Union countries. EBA has already published GL on management of non-performing and forborne exposures and also GL on disclosure of non-performing and forborne exposures.
The main objective of the published GL proposal is to prevent the newly granted loans from becoming non-performing loans in the future. In order to meet this goal, GL sets out the requirements for the internal governance and control framework, data collection from debtors and related documentation. The GL further lists the requirements for setting the price of loans on a risk-based pricing basis, on approaches to the valuation of immovable and movable collateral and on continuous monitoring of credit exposures.
From the factual point of view, the GL contains some requirements that all banks may not have fully implemented in their internal methodologies, procedures, and processes. For example, the requirement that the bank's risk appetite should specify the composition of the loan portfolio, including the geographical location of debtors, types of collateral, geographical location of collateral, economic sectors and types of credit instruments. Other areas are, for example, requirements for monitoring the risks related to climate change and their impact on the financial situation of clients. These risks should also be adequately classified, for example, as the physical risks (storms, floods, etc.) and the risks of change (technological risks, legal risks, etc.). GL also assumes that banks will use what-if analyses to assess client resilience against idiosyncratic and market events. In the field of collateral valuation, GL requires banks to ensure adequate rotation of appraisers. GL states that the change should be made after two sequential individual valuations of the immovable property has been done by the same appraiser.
On the other hand, a number of requirements contained in the GL can be considered as standard requirements which banks normally apply in the context of the internal governance and control framework and the system of lending and monitoring.
GL should enter into force on June 30th 2020 and in addition to the newly granted loans, the requirements should also apply to changes in the conditions for loans granted before that date.
27-9-2019