EBA draft guidelines on credit risk management | KPMG | GLOBAL
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EBA draft guidelines on credit risk management and accounting for expected credit losses

EBA draft guidelines on credit risk management

In July 2016, the European Banking Authority (EBA) published its consultation paper on guidelines on credit institutions’ credit risk management practices and accounting for expected loss, which provides guidance on how firms should implement the expected loss calculations contained within impending accounting standards like IFRS9 and CECL – Current Expected Credit Loss.


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The EBA paper follows closely the Basel Committee Banking Supervisions (BCBS) guidelines, with large amounts of text copied from one document to the other. However, there are some significant differences.

The EBA paper differs in a few places from the BCBS guidelines, but most significant are the guidelines on how to apply the principle of proportionality. The section of the document devoted to the application of materiality and proportionality is unclear and lacking in detail.

The BCBS guidelines were written with both IFRS9 and CECL in mind whereas the EBA paper is written from an IFRS 9 perspective. The EBA paper states that "...on the considerations on proportionate application of the EBA guidelines, the EBA notes that all credit institutions applying IFRS 9 should ensure that they meet the objectives of IFRS 9 when applying the Standard.". However, the stated objectives of the standard are "... to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows." If the standard’s objective is the establishment of principles, it is unclear how a firm would proportionately apply the EBA guidelines, as the objective of the standard must have clearly been met by the publishing of said standard.

IFRS 9 is a complex standard, and invariably simplifying assumptions are likely to be used, the guidance says "When, because of considerations relating to proportionality or materiality, credit institutions who choose to adopt an approach to ECL estimation that would generally be regarded as an approximation to ‘ideal’ measures, such approximate methods should be designed and implemented so as to avoid bias, for example, systematic delay in the recognition of credit losses." Both "ideal" and "bias" is left undefined.

Key issues for firms…

The consultation period ends 26 October 2016. Firms under the supervision of the EBA may wish to respond to the consultation to seek clarity over the key terms that govern proportionality and materiality.

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