The European Banking Authority (EBA) has published a consultation paper on draft guidelines on credit institutions’ credit risk management practices and accounting for expected credit losses. The 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 draft guidelines build on the Basel Committee on Banking Supervision (BCBS) guidance on credit risk and accounting for expected credit losses published by BCBS in December 2015.
A significant number of credit institutions in the EU apply the International Financial Reporting Standards (IFRS) which will eventually require the measurement of impairment loss provisions to be based on an expected credit loss accounting model rather than on an incurred loss accounting model. The EBA welcomes this approach on credit loss provisioning, as it should also contribute to addressing the G20’s concerns about the issue of the ‘too little, too late’ recognition of credit losses and improve the accounting recognition of credit losses by incorporating a broader range of credit information.
The EBA guidelines would not prevent a credit institution from meeting the impairment requirements of IFRS 9. Rather these guidelines should be read as the supervisory approach to support the appropriate application of those standards. These guidelines do not set out requirements regarding the determination of expected losses for regulatory capital purposes. The consultation deadline is 26 October 2016.