In December 2015, the Basel Committee on Banking Supervision (BCBS) issued supervisory guidance on credit risk and accounting for expected credit losses (the BCBS guidance), which sets out supervisory expectations for credit institutions related to sound credit risk practices associated with implementing and applying an expected credit loss (ECL) accounting model.
Building on the BCBS guidance, the European Banking Authority (EBA) has now published guidelines that aim to ensure sound credit risk management practices for credit institutions, associated with the implementation and ongoing application of ECL accounting models (the EBA guidelines).
The EBA guidelines should be read in conjunction with the provisions of the Capital Requirements Regulation and the Capital Requirements Directive IV regarding internal governance, credit risk, disclosures, supervisory review and evaluation process and requirements, and supervisory measures and powers, as supplemented by the relevant technical standards adopted by the European Commission.
The EBA guidelines include four main sections:
- section 4.1 includes some general considerations on the application of the principles of proportionality and materiality, and the use of information by credit institutions;
- section 4.2 includes eight principles, also addressed to credit institutions, which relate to the provisions for the main elements of credit risk management and accounting for ECL, and provide detailed guidance for the application of each principle;
- section 4.3 includes guidance specific to credit institutions reporting under International Financial Reporting Standards (IFRS) and is limited to providing guidance on certain aspects of the ECL requirements in the impairment section of IFRS 9 that may not be common to other ECL accounting frameworks; and
- section 4.4 includes three principles, specifically addressed to Member State competent authorities, on the supervisory evaluation of credit risk management practices, accounting for ECL and the overall capital adequacy.
In addition, the EBA guidelines should be applied with the principle of proportionality in mind.
The EBA guidelines will be translated into the official EU languages and published on the EBA website. The deadline for Member State competent authorities to report whether they comply with the EBA guidelines will be two months after the publication of the translations. The EBA guidelines will apply at the start of the first accounting period beginning on or after 1 January 2018.