IFRS9: EBA’s latest final guidelines are focusing on management’s responsibilities, credit risk management and accounting practices, urging management and supervisors to take action
Time to look beyond risk parameter modelling and impairment calculation?
On May 12, 2017, the European Banking Authority (“EBA”) has published the final version of Guidelines on credit institutions’ credit risk management practices and accounting for expected credit losses.
These Guidelines aim at ensuring sound credit risk management practices associated with the implementation and on-going application of the accounting for expected credit losses. The Guidelines are part of the EBA’s work on the implementation of IFRS 9 and its interaction with prudential requirements and build on the Guidance published by the Basel Committee on the same matter.
The guidelines contain 7 principles on credit risk management practices and accounting for expected credit losses (“ECL”), that the institutions are encouraged to follow, including:
· The responsibilities of the management body and senior management team
· The need for sound ECL methodologies to result in an appropriate and timely recognition of ECL
· An adequate credit risk rating process in place to appropriately group lending exposures on the basis of shared credit risk characteristics
· Adequacy of the allowance
· ECL model validation
· The use of experienced credit judgement
· A sound credit risk assessment and measurement process that provides with a strong basis for common processes, systems, tools and data to assess credit risk and to account for ECL
· Adequate and complete disclosures in order to promote transparency and comparability by providing timely, relevant and decision-useful information
EBA also highlight three supervisory evaluation principles for competent authorities. These cover credit risk management assessment, ECL measurement assessment and capital adequacy assessment.
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