Scope of application

These guidelines apply in relation to those credit institutions’ credit risk management practices affecting the assessment of credit risk and measurement of expected credit losses from lending exposures and allowances under the applicable accounting framework. These guidelines also apply when, where permitted by the applicable accounting framework, the carrying amount of the lending exposure is reduced directly without the use of an allowance account. These guidelines do not set out any additional requirements regarding the determination of expected loss for regulatory capital purposes.

These guidelines build on Article 74 of Directive 2013/36/EU¹⁶ which states that institutions must have adequate internal control mechanisms, including sound administration and accounting procedures that are consistent with and promote sound and effective risk management; and Article 79(b) and (c) of that Directive, which states that competent authorities must ensure that institutions have internal methodologies that enable them to assess the credit risk of exposures to individual obligors and at the portfolio level, and effective systems for the ongoing administration and monitoring of the various credit risk-bearing portfolios and exposures, including for identifying and managing problem credits and for making adequate value adjustments and provisions, respectively. In addition, Article 88(1)(b) of Directive 2013/36/EU states the principle that ‘the management body must ensure the integrity of the accounting and financial reporting systems, including financial and operational controls and compliance with the law and relevant standards’. Finally, as specified in Article 104(1) of Directive 2013/36/EU, competent authorities may apply supervisory measures including requiring credit institutions to reinforce of the arrangements, processes, mechanisms and strategies implemented in accordance with Articles 73 and 74 (Article 104(1)(b)), the application of a specific provisioning policy or treatment of assets in terms of own funds requirements (Article 104(1)(d)).

¹⁶ Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

Guidelines set out in section 4.3 only apply in relation to credit institutions which prepare their financial statements in conformity with the International Financial Reporting Standards® (‘IFRS® Standards’) adopted in accordance with Regulation (CE) 1606/2002¹⁷ and for which IFRS 9 Financial Instruments (‘IFRS 9’) applies.

¹⁷ Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (OJ L 243, 11.9.2002, p. 1). 18 EBA GL/2014/13. 19 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1-337).

For credit institutions to which ECL accounting frameworks do not apply, competent authorities should consider applying the relevant aspects of these guidelines related to credit risk management practices, as far as appropriate, within the context of the applicable accounting framework.

Competent authorities should ensure that credit institutions comply with these guidelines on an individual, sub-consolidated and consolidated basis in accordance with Article 109 of Directive 2013/36/EU.

Guidelines set out in section 4.4 should be considered as supplementing and further specifying the supervisory review and evaluation process (SREP) referred to in Article 97 and 107(1)(a) of Directive 2013/36/EU, in particular with regard to the assessment of credit risk management and controls and accounting for expected credit losses. Competent authorities should therefore comply with guidelines set out in section 4.4 in line with the EBA Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP)¹⁸ .