EBA Publishes Guidelines on Loan Origination and Monitoring
EBA published guidelines on loan origination and monitoring, which bring together prudential standards and consumer protection obligations, along with the anti-money laundering and the Environmental, Social, and Governance (ESG) considerations. The guidelines contain expectations of EBA for improved creditworthiness assessments and the expectations apply to all banks offering loans to consumers, small and medium-size enterprises (SMEs), and corporates and to other creditors offering loans to consumers. The guidelines will apply from June 30, 2021, with certain transitional arrangements.
The objective of the guidelines is to improve banks’ credit-granting practices and governance arrangements to ensure that they have robust and prudent lending standards. This in turn should ensure that newly originated loans are of high credit quality and contribute in the future to lower levels of nonperforming loans. The guidelines specify internal governance arrangements for the granting and monitoring of credit facilities throughout the lifecycle. In the guidelines, EBA also provides guidance on the valuation of collateral at the point of loan origination as well as for the monitoring and revaluation. Th guidelines clarify the credit decision-making process, including the use of automated models, building on the requirements of the EBA guidelines on internal governance. The guidelines set requirements for assessing the borrowers’ creditworthiness and for handling of information and data for the purposes of such assessments.
In these requirements, the guidelines bring together the prudential and consumer protection objectives of EBA. EBA has developed these guidelines building on the existing national experiences, addressing shortcomings in institutions’ credit granting policies and practices highlighted by past experiences. The guidelines reflect recent supervisory priorities and policy developments related to credit granting, including environmental, social and governance factors, anti-money laundering and countering terrorist financing, and technology-based innovation. The guidelines will apply from June 30, 2021. However, institutions will benefit from a series of transitional arrangements. The application of the guidelines to the already existing loans and advances that require renegotiation or contractual changes with the borrowers will be from June 30, 2022. Institutions will be allowed to address possible data gaps and adjust their monitoring frameworks and infrastructure until June 30, 2024.
Notwithstanding the extended transition period, EBA notes that all loan origination requires effective risk oversight and management. EBA also calls on competent authorities to exercise their judgment and be pragmatic and proportionate in monitoring the implementation of the guidelines, taking into account the operational challenges and priorities institutions may have due to the COVID-19 pandemic, while facilitating the economic recovery efforts. These guidelines are vital to strengthening lending standards and asset quality in the future. These guidelines will replace the existing EBA guidelines on creditworthiness assessments under the Mortgage Credit Directive (EBA/GL/2015/11), which the EBA issued in June 2015 and which will be repealed with the effect from the date of application of the guidelines on loan origination and monitoring.
Related Links
Effective Date: June 30, 2021 (with transitional arrangements)
Keywords: Europe, EU, Banking, Credit Risk, NPLs, Loan Origination, Guidelines, Mortgage Credit Directive, ESG, Governance, AML, Fintech, Artificial Intelligence, Big Data, COVID-19, EBA
Featured Experts

Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Next Article
EBA Sets Out Supervisory Convergence Plan for 2020Related Articles
EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
EBA Updates Lists of Entities for Use in Capital Calculations under SA
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS Amends Notice on Related Party Transactions of Banks
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB Amends Guideline on Euro Short-Term Rate
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA Consults on Standards Related to FRTB-SA
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA Proposes Rules Related to IRB Approach for Credit Risk
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
EU Amends CRR and Securitization Regulation in Response to Pandemic
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).