Response to consultation Paper on draft Guidelines on loan origination and monitoring.
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In more detail:
• limitations in credit decision making in terms of time and number should be removed. The number of delegated credit decisions is not correlated to an increase in terms of risks undertaken by the bank (e.g. par.59 limitations on the number of delegated approvals);
• paragraph 63, allowing individual approval only for small and non-complex transactions could significantly increase the complexity of the lending process. This could decrease the level of efficiency of banks. We propose to eliminate point a) par. 63 for all the banks that can ensure a credit process that includes an independent opinion released by the credit function (i.e. that ensures the independency of the overall judgment, limiting the discretion of the delegated role).
This approach, implying an active role performed by the risk control function during the lending phase, might be hardly applicable as:
• the prior involvement of the risk control function appears not fully coherent with the separation of responsibilities between the ex-ante first line of defence (lending functions) vs the ex-post second line of controls (risk management) and, ultimately, with the regulatory principle of segregation of duty;
• the need to have second opinion to the creditworthiness assessment might trigger process inefficiencies related to the duplication of activities and skills in charge of different functions, entailing inter alia also additional staff costs.
Moreover, such requirements would lead to the elimination of all delegated powers assigned to the bank network and, implicitly, they would hinder timeliness in decision-making to adequately serve the economy.
The institutions falling under the scope of the Guidelines should be allowed to assign (limited) credit prerogatives to the bank network when supported by clear and sound criteria and methodologies for the assessment and granting of loans and/or in relation to non-complex type of products.
We suggest replacing the “Risk management” definition with “Independent Risk Function” (as indicated in other Guidelines, i.e. Guidelines on Leveraged Transactions) to better fit banks’ organizational structures so that the required functions will be performed by areas that have the required functional competencies as long as segregation / independence toward the commercial area is ensured.
Please consider the complexity of banks’ organisation, their size and their territorial presence with, as in Intesa Sanpaolo’s case, thousands of branches serving retail clients, SMEs and Corporates. Of course, digitalisation of documents is a path already undertaken, however more time will be needed to complete the process.
For most of the loans granted to SMEs, which represent a significant proportion of Intesa Sanpaolo’s loan portfolio, some information listed in Annex 2 lead to disproportionate collecting costs compared to the economic value of the financing transaction or to the added value in the creditworthiness analysis. The Guidelines should therefore make clear that information listed in Annex 2 are examples and should be collected and verified only if they are relevant for the type of product, according to the proportionality principle. Again, the expression “at least” used by the EBA does not seem accurate as it implies that this information has always to be collected and does not allow for the application of the proportionality principle. Flexibility for less complex loans should be applied.
Asking for the mandatory availability of business plans and projections from all professionals is in clear contrast with the proportionality principle and the evidence that smaller (and therefore internally not structured) counterparties do not usually have managerial ability to develop such detailed documents. In such cases banks’ assessment should be allowed to rely on most recent historical performances and few key budgeted figures (where available) with the aim to understand their future sustainability. Involvement of internal specialist functions for all types of transactions is in fact not sustainable. Excluding the need for business plans and projections based on the borrower segment, materiality and complexity of the loan should be the possible way forward to implement the GL.
Moreover, it is not clear what the verification activities (as defined in paragraph 86 and 88) consist of and what are the possible consequences for banks in case of an inadequate course of this activity or to the lack of relevant documentation.
We underline again that the Guidelines should better state the possibility for differentiated information packages for different borrower segments according to the business of the bank (e.g. SME Retail, SME Corporate, Corporate etc.).
As we said, in general, we consider credit granting criteria set out in Annex 1 as too detailed. Our suggestion is to simplify the list and consider the criteria as non-exhaustive and non-binding.
It must be clarified that the financial metrics (ratios) listed in paragraph 135 for the purposes of the creditworthiness assessment must not be always used, regardless of the characteristics and amount of the specific financial transaction.
In any case, possible difficulties may arise from the calculation of the DSCR (Debt Service Coverage Ratio): with reference to both cash flow availability for debt service (as business plans are not always provided) and to amortization profile of third parties debt.
In addition, it is necessary to specify how banks are required to document the use of these metrics for credit decision purposes and, to what extent, they have to be implemented in their rating system.
Regarding paragraph 166 (a), when faced with non-complex real estate developments, the opinion on the marketability could be provided directly within the appraisal, thus not requiring a “location specific review of supply and demand in the market by a reputable estate agent”.
Some EU National authorities (e.g. Croatian National Bank) have defined regulatory thresholds requiring individual valuation of movable property collateral at the point of origination to be performed by a valuer. The Guidelines should allow the institutions operating under the such jurisdictions to use regulatory thresholds instead of defining further internal ones.
b) Immovable property
With reference to paragraph 207 point (b), the requirement is deemed excessive if the change of frequency or approach when monitoring the value of an immovable property collateral is linked to changes from IFRS9 stage 1 to stage 2 or vice versa. Thus, the example (“e.g. IFRS 9 Stage 1 or Stage 2”) should be cancelled. If need be, reference may be made to changes from “performing” to “non-performing” stage.
With reference to the requirement on the revaluation by a valuer of immovable property (ref. paragraph 213): in case of the review of an immovable property that should be valued by a valuer using the comparison approach, the valuer cannot perform a re-valuation neither with full valuation method nor with desk-top method, if he does not have adequate comparable data of similar immovable properties.
Furthermore, performing full appraisals for revaluation purposes instead of the current desktop or drive-by ones, would significantly increase the appraisals’ annual cost, as well as delivery time could be severely delayed.
With regards to valuer’s rotation principle stated in paragraph 214, it would be appropriate to specify that in case of Real Estate development financing, the rotation of valuers should be assured only in case of a new overall valuation of the immovable property. On the opposite, in case of activities ancillary to a valuation (e.g. inspection for verification of the work in progress), such activities should be performed by the same valuer that performed the original valuation and no rotation should be envisaged.
Furthermore, monitoring requirements should be applicable on loans granted after the date of entry into force in order to (i) avoid double reporting system (i.e. one for the stock and one for the newly originated loans) and (ii) take into account that any IT implementation on the existing stock would require time, not consistent with the proposed 30 June 2020 deadline.
Please also consider that the sources of information are management data (connected with the origination and credit management) and statistical/prudential reporting for regulatory requirements. Both sources of information must be timely connected, but at the same time they must also be constantly aligned with the ECB initiatives and requirements, either in terms of granular collection of credit data (AnaCredit) or of aggregated data collection exercises (Credit Underwriting).
In fact, the ECB requirements are very detailed and banks have already made the investments necessary to be compliant for internal monitoring with the Supervisory Authority’s requests. Therefore, we suggest that EBA Guidelines should be consistent with existing ECB monitoring data flows.
Concerning the use of early warning indicators in credit monitoring (paragraph 263), we see no major issues. Some attention should be paid in case of breach of covenants, which may also lead, in certain cases and where allowed by national law, to the termination of the contract with the client.
5. What are the respondents’ views on the requirements for governance for credit granting and monitoring (Section 4)?
The requirement set on credit decision making may limit proven and well-functioning lending activity.In more detail:
• limitations in credit decision making in terms of time and number should be removed. The number of delegated credit decisions is not correlated to an increase in terms of risks undertaken by the bank (e.g. par.59 limitations on the number of delegated approvals);
• paragraph 63, allowing individual approval only for small and non-complex transactions could significantly increase the complexity of the lending process. This could decrease the level of efficiency of banks. We propose to eliminate point a) par. 63 for all the banks that can ensure a credit process that includes an independent opinion released by the credit function (i.e. that ensures the independency of the overall judgment, limiting the discretion of the delegated role).
6. What are the respondent’s views on how the guidelines capture the role of the risk management function in credit granting process?
The requirement set out in the Guidelines for the Credit risk management and internal controls framework to provide an “independent risk opinion to the credit decision takers” (par 76c) and an “independent/second opinion to the creditworthiness assessment” (par. 76g) seems to require an ex-ante supervision of the risk management function within the credit process.This approach, implying an active role performed by the risk control function during the lending phase, might be hardly applicable as:
• the prior involvement of the risk control function appears not fully coherent with the separation of responsibilities between the ex-ante first line of defence (lending functions) vs the ex-post second line of controls (risk management) and, ultimately, with the regulatory principle of segregation of duty;
• the need to have second opinion to the creditworthiness assessment might trigger process inefficiencies related to the duplication of activities and skills in charge of different functions, entailing inter alia also additional staff costs.
Moreover, such requirements would lead to the elimination of all delegated powers assigned to the bank network and, implicitly, they would hinder timeliness in decision-making to adequately serve the economy.
The institutions falling under the scope of the Guidelines should be allowed to assign (limited) credit prerogatives to the bank network when supported by clear and sound criteria and methodologies for the assessment and granting of loans and/or in relation to non-complex type of products.
We suggest replacing the “Risk management” definition with “Independent Risk Function” (as indicated in other Guidelines, i.e. Guidelines on Leveraged Transactions) to better fit banks’ organizational structures so that the required functions will be performed by areas that have the required functional competencies as long as segregation / independence toward the commercial area is ensured.
7. What are the respondents’ views on the requirements for collection of information and documentation for the purposes of creditworthiness assessment (Section 5.1)?
Information requirements seem to be rather prescriptive and, if so, the implementation costs would be high and disproportionate. Moreover, a gap analysis will be needed and the EBA should consider that in setting the implementation date.Please consider the complexity of banks’ organisation, their size and their territorial presence with, as in Intesa Sanpaolo’s case, thousands of branches serving retail clients, SMEs and Corporates. Of course, digitalisation of documents is a path already undertaken, however more time will be needed to complete the process.
For most of the loans granted to SMEs, which represent a significant proportion of Intesa Sanpaolo’s loan portfolio, some information listed in Annex 2 lead to disproportionate collecting costs compared to the economic value of the financing transaction or to the added value in the creditworthiness analysis. The Guidelines should therefore make clear that information listed in Annex 2 are examples and should be collected and verified only if they are relevant for the type of product, according to the proportionality principle. Again, the expression “at least” used by the EBA does not seem accurate as it implies that this information has always to be collected and does not allow for the application of the proportionality principle. Flexibility for less complex loans should be applied.
Asking for the mandatory availability of business plans and projections from all professionals is in clear contrast with the proportionality principle and the evidence that smaller (and therefore internally not structured) counterparties do not usually have managerial ability to develop such detailed documents. In such cases banks’ assessment should be allowed to rely on most recent historical performances and few key budgeted figures (where available) with the aim to understand their future sustainability. Involvement of internal specialist functions for all types of transactions is in fact not sustainable. Excluding the need for business plans and projections based on the borrower segment, materiality and complexity of the loan should be the possible way forward to implement the GL.
Moreover, it is not clear what the verification activities (as defined in paragraph 86 and 88) consist of and what are the possible consequences for banks in case of an inadequate course of this activity or to the lack of relevant documentation.
We underline again that the Guidelines should better state the possibility for differentiated information packages for different borrower segments according to the business of the bank (e.g. SME Retail, SME Corporate, Corporate etc.).
8. What are the respondents’ views on the requirements for assessment of borrower’s creditworthiness (Section 5.2)?
In general, while sharing EBA’s views on the requirements for the assessment of creditworthiness, we reaffirm considerations previously summarized with reference to available information and documents (point 97) and the need for a more appropriate application of the proportionality principle. Moreover, for professional clients, sensitivity analysis may not be performed on certain subjects, as smaller clients do not always provide banks with their own forward-looking projections. In these cases, flexibility is needed.As we said, in general, we consider credit granting criteria set out in Annex 1 as too detailed. Our suggestion is to simplify the list and consider the criteria as non-exhaustive and non-binding.
It must be clarified that the financial metrics (ratios) listed in paragraph 135 for the purposes of the creditworthiness assessment must not be always used, regardless of the characteristics and amount of the specific financial transaction.
In any case, possible difficulties may arise from the calculation of the DSCR (Debt Service Coverage Ratio): with reference to both cash flow availability for debt service (as business plans are not always provided) and to amortization profile of third parties debt.
In addition, it is necessary to specify how banks are required to document the use of these metrics for credit decision purposes and, to what extent, they have to be implemented in their rating system.
Regarding paragraph 166 (a), when faced with non-complex real estate developments, the opinion on the marketability could be provided directly within the appraisal, thus not requiring a “location specific review of supply and demand in the market by a reputable estate agent”.
9. What are the respondents’ views on the scope of the asset classes and products covered in loan origination procedures (Section 5)?
No further comments beyond what indicated in relation to questions 7 and 8.10. What are the respondents’ views on the requirements for loan pricing (Section 6)?
Intesa Sanpaolo welcomes the EBA’s approach on loan pricing, considering that the pricing strategy of institutions is not meant to be in the scope of the GL.11. What are the respondents’ views on the requirements for valuation of immovable and movable property collateral (Section 7)?
a) Movable propertySome EU National authorities (e.g. Croatian National Bank) have defined regulatory thresholds requiring individual valuation of movable property collateral at the point of origination to be performed by a valuer. The Guidelines should allow the institutions operating under the such jurisdictions to use regulatory thresholds instead of defining further internal ones.
b) Immovable property
With reference to paragraph 207 point (b), the requirement is deemed excessive if the change of frequency or approach when monitoring the value of an immovable property collateral is linked to changes from IFRS9 stage 1 to stage 2 or vice versa. Thus, the example (“e.g. IFRS 9 Stage 1 or Stage 2”) should be cancelled. If need be, reference may be made to changes from “performing” to “non-performing” stage.
With reference to the requirement on the revaluation by a valuer of immovable property (ref. paragraph 213): in case of the review of an immovable property that should be valued by a valuer using the comparison approach, the valuer cannot perform a re-valuation neither with full valuation method nor with desk-top method, if he does not have adequate comparable data of similar immovable properties.
Furthermore, performing full appraisals for revaluation purposes instead of the current desktop or drive-by ones, would significantly increase the appraisals’ annual cost, as well as delivery time could be severely delayed.
With regards to valuer’s rotation principle stated in paragraph 214, it would be appropriate to specify that in case of Real Estate development financing, the rotation of valuers should be assured only in case of a new overall valuation of the immovable property. On the opposite, in case of activities ancillary to a valuation (e.g. inspection for verification of the work in progress), such activities should be performed by the same valuer that performed the original valuation and no rotation should be envisaged.
12. What are the respondents’ views on the proposed requirements on monitoring framework (Section 8)?
The principles outlined in the Guidelines concern many business areas of the bank. Therefore, it would be more appropriate to provide for a more precise and finalized application of the Guidelines to avoid the risk of operational duplication and double reporting.Furthermore, monitoring requirements should be applicable on loans granted after the date of entry into force in order to (i) avoid double reporting system (i.e. one for the stock and one for the newly originated loans) and (ii) take into account that any IT implementation on the existing stock would require time, not consistent with the proposed 30 June 2020 deadline.
Please also consider that the sources of information are management data (connected with the origination and credit management) and statistical/prudential reporting for regulatory requirements. Both sources of information must be timely connected, but at the same time they must also be constantly aligned with the ECB initiatives and requirements, either in terms of granular collection of credit data (AnaCredit) or of aggregated data collection exercises (Credit Underwriting).
In fact, the ECB requirements are very detailed and banks have already made the investments necessary to be compliant for internal monitoring with the Supervisory Authority’s requests. Therefore, we suggest that EBA Guidelines should be consistent with existing ECB monitoring data flows.
Concerning the use of early warning indicators in credit monitoring (paragraph 263), we see no major issues. Some attention should be paid in case of breach of covenants, which may also lead, in certain cases and where allowed by national law, to the termination of the contract with the client.
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