On 29 May 2020, the European Banking Authority (EBA) published its Guidelines on loan origination and monitoring with the twofold objective of tackling the EU's high level of non-performing exposures and ensuring that credit institutions continue to comply with consumer protection laws.
The Guidelines are expected to improve the financial stability of the EU's banking system.
Changes introduced by the Guidelines
The Guidelines aim to improve the practices of financial institutions and to ensure that their standards of credit risk taking, management and monitoring remain prudent and robust. To do so, the EBA introduced changes in the assessment of borrower creditworthiness and specified internal-governance arrangements for granting and monitoring credit facilities throughout their lifecycle.
In particular, in an effort to address institutional deficiencies in credit-granting policies, the Guidelines introduce the following changes:
- clarify the internal governance and control framework for the credit-granting and decision-making process, which builds on the requirements of EBA's guidelines on internal governance;
- specify the requirements for borrower credit-worthiness assessments by differentiating between lending to consumers, micro and small enterprises, and medium-sized and large enterprises, and setting out how information for the purposes of these assessments should be handled;
- set down supervisory expectations for the risk-based pricing of loans;
- provide guidance on the approaches to the valuation of immovable and movable property collateral at the point of credit granting, and the monitoring and review of the value of such collateral, based on the outcomes of the monitoring; and
- specify the ongoing monitoring of credit risk and credit exposures, including regular credit reviews of borrowers.
The Guidelines are scheduled to come into force on 30 June 2021. In light of the COVID-19 pandemic, however, the EBA has offered a flexible three-phase implementation plan:
- Phase one: the application of the Guidelines to newly originated loans that come into effect in June 2021;
- Phase two: the application of the Guidelines to already existing loans and advances that require renegotiation or contractual changes with the borrowers will apply from 30 June 2022;
- Phase three: the application of supplementary provisions on monitoring, data collection and retention will go into force from 30 June 2024.
This four-year implementation of the Guidelines between 2020 and 2024 will reflect the balance between the needs of banks to focus on immediate COVID-19-related operational priorities and the EBA's longer-term interests in strengthening future lending.
For further information on these Guidelines and their impact on the banking sector, call or email your regular CMS contact or our local CMS expert Ivan Gergov, CMS Sofia.