European Banking Authority Proposes Guidelines on Loan Origination and Monitoring

The European Banking Authority has launched a consultation on draft Guidelines on loan origination and monitoring. The consultation stems from the European Council's Action Plan on tackling non-performing loans in Europe. The purpose of the guidelines is to improve the processes by which institutions grant loans and monitor them thereafter, with the overarching goal of improving the financial stability of the EU financial system.

National regulators and financial institutions are obliged to make every effort to comply with the guidelines, which include:
 

• Governance requirements for credit granting and monitoring, including: an expectation that management bodies will define the credit risk appetite of their institution and approve credit risk strategy; credit risk cultures will be aligned with EBA Guidelines on internal governance and provide a 'tone from the top'; and credit risk policies and procedures will take account of factors including technology-enabled innovation and environmental factors and green lending;
• Loan origination procedures, which should include: collection of sufficient information to assess a borrower's creditworthiness; performing a creditworthiness assessment which takes account of at least the borrower's income, disposable income, financial situation and source of repayment; and development of appropriate documentation on credit decisions and loan agreements;
• Pricing of loans, based on a comprehensive framework that reflects credit risk appetite and business strategies;
• Standards for the valuation of property that is the subject of security granted under the loan; and
• Requirements for the monitoring of credit risk exposures once loans have been made, including monitoring of covenant compliance and conducting regular stress testing of credit portfolios.

Respondents are asked to provide feedback on the guidelines by September 30, 2019. A public hearing will take place at the EBA on September 20, 2019.

View the EBA's Consultation Paper.

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