NBB Circular NBB_2017_26: Implementation of EBA Guidelines on Credit Risk Management and Expected Credit Losses

NBB_2017_26 - 11 October 2017 Circular – Page 1/3 14 Berlaimont Boulevard – BE-1000 Brussels tel. +32 2 221 38 12 – fax + 32 2 221 31 04 company number: 0203.201.340 RPM Brussels www.bnb.be

Circular
Brussels, 11 October 2017
Reference: NBB_2017_26 your correspondents:
Michel Colinet / Nathalie Parfait
Tel. +32 2 221 37 17/ 53 64
Fax +32 2 221 31 04 michel.colinet@nbb.be – nathalie.parfait@nbb.be

EBA Guidelines of 12 May 2017 on credit risk management practices of credit institutions and the accounting of expected credit losses

Scope

• Belgian credit institutions.
• Financial services groups whose parent company is a regulated Belgian institution (hereinafter "financial companies") and financial services groups whose parent company is a Belgian mixed financial company (hereinafter "mixed financial companies").

Summary/Objectives
This circular aims to implement the guidelines of the European Banking Authority (EBA) of 12 May 2017 on credit risk management practices of credit institutions and the accounting of expected credit losses.

Circular – Page 2/3 NBB_2017_26 - 11 October 2017

Madam,
Sir,

This circular aims to implement the guidelines of the European Banking Authority (EBA or EBA in English and hereinafter) of 12 May 2017 on credit risk management practices of credit institutions and the accounting of expected credit losses. It reproduces, in its entirety in the annex, the text prepared by the EBA in French. The annex is also available on the website of the National Bank of Belgium.

The EBA guidelines aim to ensure sound credit risk management practices associated with the implementation and continuous application of the accounting of expected credit losses. These guidelines are part of the EBA's work on the implementation of the IFRS9 Financial Instruments standard, and its interaction with prudential requirements, and are based on the guidelines published in December 2015 by the Basel Committee on the same issue.

A significant number of credit institutions and financial companies in the European Union apply IFRS standards, which for accounting periods open from 1 January 2018 require that impairment provisions be calculated based on an expected credit loss accounting model (Expected Credit Loss model - abbreviated as "ECL" - of the IFRS9 standard) rather than on an incurred loss model ("Incurred loss model" of the IAS39 standard).

This new accounting approach will help address G20 concerns regarding the "too little, too late" recognition of credit losses inherent in the IAS39 standard, and will improve the accounting of credit losses by integrating a wider range of information concerning credit risk.

The EBA guidelines emphasize practices considered appropriate for credit risk management within credit institutions, which are also associated with the implementation and continuous application of the accounting of expected credit losses. High-quality and consistent application of accounting standards is the basis for the effective and comparable application of prudential requirements.

These guidelines are consistent with the IFRS9 standard. They do not aim to establish specific requirements concerning the determination of expected losses for regulatory capital purposes. Their application by the concerned institutions for the preparation of their IFRS consolidated accounts therefore does not prevent these institutions from meeting the requirements of the IFRS9 standard.

The EBA guidelines highlight the importance of the principle of proportionality, while insisting on the importance for all credit institutions, given the particular nature of their activities, to ensure a high-quality implementation of the IFRS9 standard.

Impact studies carried out by the EBA in 2016 and 2017 have shown the importance of thorough preparation by the concerned institutions to ensure rigorous and reliable application of the IFRS9 standard from 2018. In this context, the EBA guidelines set out a number of expectations whose application will enhance the quality of the information that institutions will produce under the IFRS9 standard. This includes, in particular, the importance of aligning accounting and prudential concepts and techniques in credit risk as much as possible, such as the definition of the notion of "default" or the reuse (with necessary adaptations) of data, processes and tools that are already in place for the calculation of expected losses for certain prudential requirement calculation methods.

This circular aims to integrate the EBA guidelines into the national framework, concerning Belgian credit institutions, financial companies and mixed financial companies that prepare their annual consolidated accounts and/or their prudential reports (FINREP/COREP) based on IFRS standards.

NBB_2017_26 - 11 October 2017 Circular – Page 3/3

A copy of this is sent to the auditor(s), approved auditor(s) of your institution.
Please accept, Madam, Sir, our distinguished salutations.

Jan Smets
Governor

Annex:

1. BNB_2017_26_annex / Guidelines of the European Banking Authority (EBA) of 12 May 2017 on credit risk management practices of credit institutions and the accounting of expected credit losses