EBA Report Notes Loan Origination Should Remain in Supervisory Focus
EBA published a report that examines the convergence of prudential supervisory practices in 2020 and offers conclusions of the EBA college monitoring activity. Overall, the report finds that supervisors converged in using the key topics of the EBA 2020 Convergence Plan in their supervisory work in 2020 and good progress in supervisors’ efforts could be achieved across EU. This is despite a refocusing of supervisory practices toward the areas impacted by the COVID-19 crisis, in line with the EBA guidelines on the pragmatic 2020 Supervisory Review and Evaluation Process (SREP).
The report finds that, in 2020, increased supervisory attention was given to the assessment of profitability and the business model (closely linked to asset quality) as well as to selected areas of ICT risk and operational resilience, while the loan origination key topic received less supervisory attention as COVID-19 shifted the focus within the "life cycle" from loan origination to the management of distressed debtors and to the monitoring of risk exposures. Therefore, loan origination practices should remain an area of attention for supervisors in 2021 and onward. EBA had published guidelines on loan origination and monitoring in May 2020 and these guidelines will apply from June 30, 2021, but institutions could benefit from a series of transitional arrangements, with possible data gaps to be addressed until June 30, 2024 together with the adjustment of monitoring frameworks and infrastructure. The 2020 Convergence Plan had invited competent authorities to work with institutions to improve their loan origination practices in preparation for the implementation of the guidelines by undertaking a gap analysis, allowing room for a pragmatic and proportionate approach to monitoring the implementation of the guidelines, and exercising supervisory judgment, while considering the operational challenges and priorities institutions may have due to the COVID-19 crisis. The report notes that loan origination will be an integral part of the overall "asset quality and credit risk management" key topic in the 2021 Convergence Plan.
In addition, EBA observed continued efforts by competent authorities to cooperate with their resolution authority counterparts. It was also noted that prudential supervisory practices have been converging in the context of money laundering and terrorist financing risk. Nevertheless, some differences remain in supervisory practices both in the context of the Convergence Plan as well as in the broader Pillar 2 framework, affecting the setting of Pillar 2 Requirements and Pillar 2 Guidance. Another key element of the report is the convergence in supervisory colleges, where EBA observed increased interaction in 2020, compared to 2019, due to the close cooperation among college members during the pandemic and the colleges definitely becoming the natural platform for exchanges when it comes to cross-border banks. This report also incorporates the EBA 2021 Convergence Plan that guides supervisory efforts in 2021. Under the 2021 Convergence Plan, EBA has set out four key topics, which, in 2021, will require heightened supervisory attention: asset quality and credit risk management; ICT and security risk, operational resilience; profitability and business model; and capital and liability management. The selection of these key areas for 2021 were primarily driven by the implications of the COVID-19 pandemic while they also ensure continuity in other areas to enhance supervisory efforts toward further convergence.
EBA actively drives the convergence efforts by establishing the annual Convergence Plan, the implementation of which is then followed up by EBA, together with other aspects of the supervisory review process. In the context of the SREP, EBA is mandated to annually report to the European Parliament and the Council on the degree of convergence of the application of the supervisory review as mandated by Article 107 of the Capital Requirements Directive (CRD). Thus, EBA has prepared this report in line with this mandate to inform the Parliament and the Council on the degree of convergence of supervisory practices in 2020.
Keywords: Europe, EU, Banking, SREP, CRD, Loan Origination, Credit Risk, Operational Resilience, COVID-19, Supervisory Convergence, Pillar 2, AML/CFT, EBA
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