New EBA loan origination rules tighten lending procedures

The European Banking Authority has announced more intensive creditworthiness tests in new loan origination guidelines set to take effect next year, in a bid to reduce banks’ non-performing exposures.

The EBA outlined the new guidelines in a report published on 29 May.

The guidelines detail new requirements for banks to follow when considering loan applications from large or medium-sized enterprises and individual consumers.

They instruct banks to consider borrowers’ organisational structure, business model and strategy along with their alternative financial commitments.

When a borrower is a member of a group of “connected clients”, the EBA says that institutions should assess the whole group, especially when repayment is reliant on cash flow stemming from those parties.

The authority also asserts that for cross-border transactions lenders should take into account the political, economic and legal environment in which the foreign counterparty of the bank’s client operates.

Banks will also be expected to undertake a more detailed analysis of the borrower’s business model if there are higher environmental, social, and governance (ESG) risk factors involved.

This could include a review of current and projected greenhouse gas emissions, the current market environment, the borrower’s supervisory ESG requirements and the likely impacts of ESG regulation on the borrower’s financial position.

The guidelines also address banks’ credit decision-making frameworks and models for automated creditworthiness assessments.

The guidelines will be applied from 30 June 2021. However, there are additional transition periods for recently renegotiated loans, for which implementation will be one year later.

Jose Manuel Campa, head of the EBA, said that amid the covid-19 pandemic, it is key that institutions maintain good credit risk management and monitoring standards.

“The [extended] transition periods will help institutions better focus on immediate operational priorities,” he said.

He added that the new guidelines represent a first for the body by bringing together both prudential and consumer protection perspectives, which he said lie “at the heart of sound and sustainable lending to consumers, SMEs and corporates”.

The new rules stem from a 2017 European Council request for the EBA 2017 to “issue detailed guidelines” on banks’ loan origination, monitoring and internal governance.

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