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EBA consultation: expected credit losses

EBA consultation: expected credit losses

Guidance too prescriptive, seems to promote automatic risk management based on decision trees rather than expert judgment based on risk indicators.



>> Read the .pdf version of ESBG response








​​BRUSSELS, 26 October 2016 - ​ESBG submitted today its response to the European Banking Authority (EBA) ​consultation on their draft guidelines on credit institutions’ credit risk management practices and accounting for expected credit losses. 

In their response to the consultation, launched in late July, ESBG members appreciated the guidance from the EBA but warned that it may be too prescriptive and expressed concerns regarding the possible unintended impact it will have on, the as yet untested, IFRS 9. It was, in fact, suggested that the EBA should allow firms to adopt a common and practically workable interpretation of IFRS 9 over time in dialogue with its auditors. The longstanding issue of proportionality in European legislation was again raised by members and the EBA were encouraged to apply the principle of proportionality should be applied on the individual bank or portfolio level, also where the bank or portfolio is part of a larger banking group.

Why the guidelines are important for savings, retail banks

These guidelines are required to implement the guidance on the same topic published by the Basel Committee on Banking Supervision (BCBS) in December 2015. The BCBS paper sets out its supervisory guidance on sound credit risk practices associated with the implementation an ongoing application of expected credit loss (ECL) accounting frameworks. The scope of credit risk practices for this guidance is limited to those practices affecting the assessment and measurement of ECL and allowances under the applicable accounting framework. The move to ECL accounting frameworks by accounting standard setters is seen as an important step forward in resolving the weakness identified during the financial crisis that credit loss recognition was too little, too late. The European Union level implementation of this guidance that will be carried out by the EBA will be quite close to the text supplied by BCBS.

​What's next

The EBA’s next steps in this process will be to review the feedback received from the consultation and to finalise the guidelines, in Q4 2016 or Q1 2017. The finalised guidelines will be published in first half 2017 with implementation from 1 January 2018. At a recent public hearing on this topic the EBA reiterated that in assembling the final guidelines they will be avoiding deviation from the BCBS guidelines as much as possible to ensure consistent application.



IFRS; European Supervisory Authorities (EBA-ESMA); Accountancy; Basel III