The New EBA Guidance on Loan Origination and Monitoring: lessons learned has been saved
The New EBA Guidance on Loan Origination and Monitoring: lessons learned
How to use the new guidance to your bank’s advantage
The upcoming EBA Guidance on Loan Origination and Monitoring will definitely impact your institution. Now is the time to assess the status of the implementation of guidelines within your organisation, and start working towards a coherent implementation of the new loan origination and monitoring standards by 30 June 2021. What are the three main areas of potential areas?
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Lessons learned and observations
The new EBA Guidance on Loan Origination and Monitoring (EBA/GL/2020/06, the EBA guidelines) will be effective as of 30 June 2021. By then, banks will need to have those guidelines implemented for all newly originated loans, and will have four years to start the conversion of their entire portfolio. Now might be a good time to have a look at the advantages for the banking community. As Deloitte, we have performed work in this field for various banks and are keen on sharing our lessons learned and practical observations below.
The EBA Guidance specifies the new requirements concerning the creditworthiness assessment of customers. The guidelines differentiate by type of exposure and borrower. In particular:
- Institutions are expected to collect and verify a prescriptive list of points of specific information. This list can differ among various types of borrowers and exposures.
- Processes should allow a comprehensive and up-to-date ”single customer view” regarding the borrower’s repayment capacity, and challenge and stress the borrower’s data.
- ESG1 factors and AML/CFT2 are increasingly important in the loan origination process.
Impact and change arise from three aspects. First of all, the above changes imply that the reengineering of loan procedures would be necessary to meet the documentation and data requirements. Secondly, banks should be prepared to enhance processes in order to challenge data that are provided by a borrower, and to ensure that the credit risk decisions are based on high quality and granular data. Finally, (further) alignment of credit risk strategy with the Risk Appetite Framework within the bank is required.
The input from all loan origination processes will be turned into data. In addition to portfolio revisions this will provide input for loan monitoring. To accelerate the quality of the monitoring processes, it is important that your data and information management are up-to-par. A long list of solutions is available in the market or can even be built in-house. Here are two main pointers for you based on the EBA Guidance and our experiences in the market:
- When using technology-enabled innovation, banks should be able to understand the models, measures and outcomes and impacts of the technology.
- A tooling is not a solution in itself - the bank needs to define the challenge it faces, and understand how tooling can help with the solution.
Once a new loan has been granted to a client, the process of loan monitoring will start. The EBA Guidance specifies the ongoing monitoring of credit risk and credit exposures throughout the life of a loan. Based on the information and granular risk data collected banks can further enhance their monitor framework to perform regular credit reviews of their borrowers. Two main pointers will impact banks:
- Institutions are expected to “perform regular credit reviews of borrowers” to “identify any changes in their risk profile, financial position or creditworthiness compared with the criteria and the assessment at the point of loan origination”.
A specific element from the EBA Guidance during this review regards assessing the ability to repay or refinance its debts during the lifetime of a loan.
- A development we observe regarding monitoring is a change from a more administrative-driven review process (i.e. strict review calendar) towards a more event-driven and risk-based review process. Although all clients must be assessed periodically, it is vital to give the appropriate amount of attention to the right clients. This requires the set-up of a decent early warning indicator (EWI) framework. The framework should include individual client parameters, sector-based parameters, and macro-economic factors, according to the EBA Guidance.
Time to act
We have four more months ahead of us and banks have been busy implementing the new EBA Guidance during the last period. As a consequence, they already have many pieces of the jigsaw. Now is the time to put all those pieces together, in order to provide a complete and coherent picture of all relevant aspects such as loan origination, data, monitoring and reporting before 30/6/2021.
1-ESG: Environmental, Social and Coporate governance
2-AML/CFT: Anti-Money Laundering/Combating the Financing of Terrorism
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