We would like to reflect on specific requirements in this chapter:
• Paragraph 59
For handling corporate clients, setting limits on the number of the credit decisions made under the delegated approval authority is not deemed as a meaningful instrument for controlling and managing risks. Credit approvals have a direct relation to the business volume processed within the institution, where credit turnaround times play a key role in providing a meaningful and timely service to customers. Thus setting limits on the number of credit approvals decided by the delegated authority would significantly impair the capability of the institution to timely process the requests from clients and does not reflect the quality / qualification of the staff that has been given the delegated approval authority and rather supports the decision making strongly relying on the organizational hierarchy. It also interferes with the goals of implementing a risk culture where all employees are expected to take the right decisions for the bank to mitigate risks, and is deemed to contradict the meaningful regulatory expectation that the staff involved in the credit decision processes should be adequately skilled, resourced and experienced (see section 4.1.1, point 21 f).
We would propose to amend this requirement set in # 59 by excluding the quantitative limits of decisions made in delegated approval authorities and to keep only the limitation of the time period for delegated powers, which means in practice that the delegation should be periodically reviewed, i.e. on annual basis, and confirmed.
“(…) on the time period for the delegated powers and the number of delegated approvals.
• Paragraph 60 and 61 (Credit decision making)
When delegating tasks the number of approvals should not be limited as the number is no risk-related feature, whereas the credit limits and maximum exposures are already sufficient in curtailing the risk. Rec. 60 could be understood to involve risk functions also in daily business, as this is also the case with rec. 61 („when the credit risk management function and head of risk management function are represented in credit committees…“). Such functions shall oversee correct processes and manuals, and shall not be involved in day-to-day transactions.
• Paragraph 63 (Credit decision making - independence in credit decision making)
Potential conflicts of interest are determined too far in para 63. To find the correct way in order to prevent or mitigate such conflicts must still be at discretion of the institutions. The principles for conflicts of interest are deemed to be sufficient within the EBA-guidelines on internal governance (EBA/GL/2017/11).
Furthermore, according to para 63 of the Guidelines institutions should ensure that the principle of independence and minimization of conflict of interest is implemented in the framework for credit decision making. Para 63 (b) contains a list of specific situations, such as the presence of a personal or professional relationship with the borrower, in which an individual should not take part in credit decisions. Since small regional banks provide their services in rural areas, where people are usually familiar with each other, those specific sets of situations, in which an individual cannot take part in a credit decision, especially restricts their business activities.
Therefore, we suggest rather to generally describe the principle of independence in the guidelines, than listing specific situations, in which an individual is biased.
• Paragraph 65 and 66 (Credit decision making - escalation procedures)
Para 65 and 66 of the Guidelines contain requirements for exceptions and escalation procedures. According to para 66 institutions should ensure that staff members involved in credit granting and management escalate and report the full nature of exceptions to policies and breaches of limits internally to the appropriate governance body in accordance with the escalation procedure. We are of the view that not each single exception to policies and breach of limits should trigger an escalation procedure, since the execution of an escalation procedure affords personal and organizational resources, which is problematic especially for smaller banks.
For that reason, we suggest to implement a relevance limit for escalation procedures in the case of exceptions to policies and breaches of limits, below which no escalation procedure should be triggered.
• Paragraph 68
The materiality principle based on the size, nature and complexity of the credit facility (see para 14) is not applicable to section 4, in which the standards for lending to the affiliated parties are included in 4.4.3. Therefore this requirements reads that any lending to affiliated parties, including intra-group, even if the amount is rather minor (starting from €1) should be approved by the entire management body or its empowered committee, even if the amount is minor. Such interpretation of the rule is not practicable. Such lending should be subject to setting up appropriate approval authorities, which including de minimis rules and delegation, where appropriate. We propose the following amendment of para 68 to allow for de minimis rules and delegation:
“Lending affiliated parties, or any material changes of the terms of the existing credit facilities to affiliated parties should be subject to approval of the management body or a committee of the management body empowered to deal with affiliated party lending, where appropriate.”
Moreover, terhe is no definition for „affiliated party“, yet it is important to determine this to e.g. the rules of accounting.
• Paragraph 70 to 76
It is important to keep the level of detailled requirements down to the most necessary extent, and that only selected and very important requirements shall become mandatory for best practice, while others shall serve as examples only. Rec. 76 (k) is such an example, demanding stress tests for aggregated and relevant sub-portfolios. The rules for stress tests are already existing in other EBA-guidelines, with no need for duplication. Which data the institution shall take for robust stress testing (e.g. for new products, main product lines, certain subgroups etc.) shall be at the discretion of the institutions and the purpose it is aiming at. Rec. 76 should therefore be understood only as orientation, not as mandatory („at least“).

• Paragraph 76 g (Credit risk management and internal control frameworks - Second/independent opinion)

According to para 76 (g) of the Guidelines, institutions should ensure within their credit risk management and control framework that a second/independent opinion is provided in relation to the creditworthiness assessment and credit risk analysis. This requirement is neither proportionate in relation to simple and small credit facilities nor is it proportionate in relation to small regional banks, who cannot afford to provide a second/independent opinion in relation to the creditworthiness assessment and credit risk analysis in every single case.

Therefore, we suggest to include exemptions from the requirement to provide a second/independent opinion in relation to the creditworthiness assessment and credit risk analysis for simple and small credit facilities as well as for small institutions.

Para 76 (g) should be amended as follows:
“providing independent/second opinion to the creditworthiness assessment and credit risk analysis, where it is appropriate;”
According to para 76 (k) of the Guidelines, institutions should ensure within their credit risk management and control framework that stress tests are performed on an aggregate credit portfolio as well as on relevant subportfolios and geographical segments. Especially, for small regional banks it is not feasible to perform regular stress tests, especially in the area of small consumers loans. Small regional banks would neither have the personal nor monetary resources to comply with the requirement to perform regular stress test for all sorts of loans.

Hence, para 76 (k) should be amended as follows:

“performing stress tests on the aggregate credit portfolio as well as on relevant sub-portfolios and geographical segments, where it is appropriate in relation to the size of the credit portfolio;”.
Furthermore, we would like to include the following remarks:
• Paragraph 82 (Institutions’ remuneration policies and practices)
Regulation only valid for (retail) staff with decision making competence and receiving a relevant bonus payment:
The draft guidelines of EBA currently define the scope as 'all staff engaged in the credit granting, administration & monitoring process'. However, credit institutions are actually developing and close to launch a fully digital (automated and pre-approved), end to end process for customers in the Retail loan granting process. Checks and decisions are generally fully automated or centrally decided and the role of the account manager in the front office is in this context, in general, limited to collect informations and documents from the customer. Therefore we request that the scope should be limited to the (retail) staff with decision making competence and receiving a relevant bonus payment.

• Long term quality only influenceable in the first 12 months:
The long-term quality of a credit beyond 12 months is rather driven by macroeconomic factors and is not really influenceable account managers. Therefore we need a clarification on how "long-term quality of credit" has to be seen in the variable remuneration of the sales staff, considering that whatever risk prevention role the account manager in the front office can perform relates mainly to fraudulent behavior measured by early warning types of KPIs, while the long-term quality of credit is mainly influenced by economic and social developments in the country."

By far the most challenging requirements are to be found in this chapter and annex 2. The stipulation „should collect and verify…at least“ can only be done for certain products to this extent. Thus, they represent rather the maximum than the minimum of collectable information. There is only a differentiation between consumers and „professionals“, leaving open to guess what this term means. Moreover, a clearer distinction between at least SME and large corporates is missing. Standardised products need less information in general for evaluation than tailor-made ones. The criteria are too rigid for such differentiations. Features such as maturity, amount, new or existing customer could justify different levels of information, also. In total, much more room must be given for institutions which developed specific creditworthiness assessment tools. Those tools and systems will be continuously enhanced, using special algorithms, thus continuosly learning. By forcing those systems to take up certain mandatory features those algorithms could be disturbed. This could be a significant setback for such systems. Instead of demanding these features to be taken up „at least“, it is better to refer to „where relevant and applicable“. Para101 and following recitals are demanding for sensitivity analysis for consumers under various requirements. We want to refer in that respect to our former statement regarding stresstesting. Any other additional requirements can be extremely burdensome, such as those in para 144 to 146.
Moreover, the requirement to make enquiries to third parties could be difficult to handle in practice from an operational and data protection point of view. The obligation to respect Regulation 2018/1725 in efforts to verify information is duly noted and goes without saying. However, the GDPR also requires the consumer to give consent to the bank in order for these enquiries to be made. If this consent is not given and the information provided cannot be verified, banks will not be able to comply with the guidelines. We therefore understand “reasonable” in paragraph 88 to mean that in such a case verification is not required.
• Paragraph 88 and 89 (Collection of information - Verification and reasonable enquiries)
Para 88 and 89 of the Guidelines oblige institutions to assess the plausibility of any information and to make reasonable enquiries to the borrower or third parties (employer, public authorities). The requirement to assess the plausibility of any information is not appropriate. From our point of view information of the borrower should only then be verified, if the information is evidently false or there are serious doubts, whether the information is true or not. The borrower is primarily responsible for the verity of the provided information. A part of that, institutions should only then be required to make reasonable enquiries, if those enquiries are necessary to obtain further information. In cases, where institutions and creditors already have enough information (for example in the case of a long-term customer relationship), they should not be required to make reasonable enquiries.
Therefore, para 88 should be amended as follows as it would be in line with the wording in Article 20(1) Directive 2014/17/EU and Article 8(1) Directive 2008/48/EC.
“Institutions and creditors should assess the plausibility of any information and data provided by the borrower and should make any necessary checks to verify the authenticity of information, where the information is evidently false or there are serious doubts, whether the information is true. When verifying a borrower’s prospect to meet its obligations under the loan agreement, institutions and creditors should make reasonable enquiries to the borrower or third parties (e.g. employer, public authorities, credit register bureau) and take reasonable steps to verify the information and data collected, if necessary, to obtain further relevant information (…).”.
• Paragraph 92 (Collection of information – Information and data according to Annex 2)
According to para 92 (para 94 regarding lending to professionals) institutions and creditors should at least consider collecting the information and data as set out in Annex 2. In our view it is inappropriate to collect all the information listed in Annex 2, such as detailed evidence of employment (type, sector, status, duration) and income (annual bonus, commission, overtime), in each single case (even in the case of minor overdrafts or small one-time credit facilities). As already mentioned above concerning Annex 1, Annex 2 should also rather provide an exemplary guidance to institutions.
This has to be explicitly clarified in the Guidelines.
Therefore, we suggest the EBA to change the wording of para 92 (para 94) in the following way:
“For the purposes of the collection and verification of information, institutions and creditors should at least consider collecting the information and data as set out in Annex 2 as an exemplary guidance.”
Furthermore, we would like to include the following remarks:
Page 70 – 73 – Annex 2
Diverse specific requirements (commercial real estate lending to professionals, real estate development lending, project and infrastructure lending should be supplemented by “where relevant” as some of the requested information depend on the type of a real estate; i.e. location specific review of supply and demand not relevant for social housing; Information on major tenants per property type, property age and location not relevant rented apartment construction.
• Lending to professional:
3. In case of ring-fenced RE structures the submission of financing statements on a consolidated level is difficult / not possible from the contractual point of view
• Commercial Real Estate Lending to professionals
1. submission of all contracts for particular property is currently not possible, also from the contractual point of view
6. The requirement is partially unclear and creates confusion. We would welcome guidance on what the regulatory expectation is meant with the information on the rationale for the property. Additionally this rules should recognize that the bank internal, independent from the market evaluators/surveyors are considered as acceptable.
• Real Estate development lending
5. submission of all contracts for particular development is currently not possible, also from the contractual point of view
6. The requirement is partially unclear and creates confusion. We would welcome guidance on what the regulatory expectation is meant with the information on the rationale for the property. Additionally this rules should recognize that the bank internal, independent from the market evaluators/surveyors are considered as acceptable.
7. In the real estate development lending states independent qualified and reputable quantity surveyor, whereas point 8 in the project and infrastructure finance states qualified and reputable surveyor.
In general, we propose to add “Where appropriate and possible to the extent necessary to reasonably assess the inherent risk” at the beginning of Annex 2.
In addition, we propose to align requirements to ensure consistency. The rules should recognize that bank internal, independent from the market, evaluators /surveyor should be considered as acceptable.

We would like to reflect on specific requirements in this chapter:
• Paragraph 99 (assessment of borrower’s creditworthiness (p. 36f et seq):
Ratios: Para 99 contains ratios for the assessment of the creditworthiness. Together with para 100 those ratios imply to reduce the assessment of creditworthiness to such ratios only. In practice those ratios are only one of many steps for the assessment. Para 99 could be introduced by „Amongst others, institutions should…“. Second, the ratios shown in the guidelines are of limited value in certain cases (e.g. debt service to income ratio), see for instance professions with irregular income such as free-lancers or seasonal workers. Alternative ratios reflecting such circumstances must be possible as well. The same is true for para 135 for „professional borrowers“. The „capitalisation rate“ (net operating income/market value) is easy to get for listed companies, while the reverse is true for any non-listed company. Moreover, „projection of all cost“ as demanded in para 122 and 166 is very difficult and burdensome to receive or to estimate, same with para140. Those items shall not be compulsory.

• Paragraphs 101, 114 and 121 (Assessment of borrower’s creditworthiness - sensitivity analysis for consumer loans)
According to para 101 (para 114 regarding other secured lending to consumers, para 121 unsecured lending to consumers) banks should carry out sensitivity analyses reflecting potential negative scenarios in the future when assessing the borrower’s ability to meet obligations under the loan agreement. Generally, it is unusual to perform sensitivity analysis in the field of consumer lending. Performing sensitivity analyses should not be required for small/simple credit facilities and credit facilities of limited duration. The EBA should set up a threshold regarding the loan amount in relation to the balance sheet and duration of credit facilities, below which no sensitivity analysis must be performed. This would better reflect the second aspect of the principle of proportionality in this requirement. A part of that, the Consumer Credit Directive (Directive 2008/48/EC) does not require institutions to perform sensitivity analyses in relation to consumer loans.
Against this background we suggest exemptions from the requirement to perform sensitivity analyses for smaller/less complex credit facilities and credit facilities of limited duration in relation to consumer loans (para 101, 114 and 121). The EBA could set up a threshold for credit facilities in relation to the balance sheet, below which no sensitivity analyses must be performed.
• Paragraphs 104 / 117
In respect to the requirement to make reasonable enquiries and take reasonable steps to verify the borrower’s ability to meet obligations (in particular related to self-employed or having seasonal or other irregular income) it is explicitly stated that such verification should include documentation of income, third party verification and tax declaration. In line with our comments on the proportionality principle to explicitly include next to considerations of the credit facilities also some client segments like i.e. social banking, the creditworthiness assessment of the vulnerable clients is based on the ability to prove “regular savings” as “income surrogate” in most cases.
In order to adapt these guideline also for other client segments like social banking, we would propose to explicitly allow the proof of “regular savings” as an adequate “income surrogate” within the creditworthiness assessment. Such proof over a pre-defined period (i.e. one year) can represent a very good surrogate for vulnerable client segments with irregular income.

• Paragraph 107 (Assessment of borrower’s creditworthiness – retirement age)
According to para 107 (Lending to consumers relating to residential immovable property) and para 119 (unsecured lending to consumers) if the loan term extends past the borrower’s expected retirement age, the institutions and creditors should take appropriate account of the adequacy of the borrower’s likely income and ability to continue to meet obligations under the loan agreement in retirement. It should be clarified in this regard that institutions should only then be required to take appropriate account of the adequacy of the borrower’s likely income in retirement, if the loan agreement significantly exceeds the retirement age. If – for example - a loan has a duration of twenty years and exceeds the retirement age only by one year, it would be inappropriate to require institutions to consider the borrower’s income in retirement.
A part of that, it must be ensured that the requirement to take appropriate account of the adequacy of the borrower’s likely income in retirement does not restrict lending to elderly people - who are near the retirement age - in a discriminatory way. Even today lending to elderly people and especially lending to pensioners is only allowed under restrictive conditions and therefore shouldn’t be further restricted.
Hence, para 107 and 119 should be amended as follows:
“If the loan term extends significantly past the borrower’s expected retirement age, the institutions and creditors should take appropriate account of the adequacy of the borrower’s likely income and ability to continue to meet obligations under the loan agreement in retirement.”
• Paragraph 108 (Assessment of borrower’s creditworthiness – increase in income)
According to para 108 (lending to consumers relating to residential immovable property) and para 120 (unsecured lending to consumers) institutions and creditors should ensure that the borrower’s ability to meet obligations under the loan agreement is not based on the expected significant increase in the borrower’s income unless the documentation provides sufficient evidence. The documentation requirement is insofar problematic, as it prohibits considering borrower’s likely raise of income in the near future, when it cannot be documented. Especially young borrowers, whose raise in income in the future is likely (but not documented), are restricted in taking up a credit. In this regard the Guidelines should allow institutions and creditors to consider the specific circumstances of the individual case.
Therefore, para 108 and 120 should be amended as follows:
“…is not based on the expected significant increase in the borrower’s income unless the documentation provides sufficient evidence, or the specific circumstances of the individual case indicate a significant increase in the borrower’s income.”

• Paragraph 126
In principle we agree with the list of the requirements that need to be considered when carrying out the creditworthiness assessment. However some aspects listed as part of the considerations of the transaction structure in point g., i.e. leverage level, dividend distribution, capital expenditure, should be taken into account when performing the analysis of the financial position of the borrower as stipulated in a. and as defined in # 132 of these guideline. We propose the following amendment in #126 g:
“g. assess the structure of the transaction including the risk of structural subordination and related terms such as covenants, leverage level, dividend distribution, capital expenditure and, if applicable, third-party guarantees and collateral structure; and”
• Paragraph 129
In those cases where all of these risk are explicitly taken over by external credit assessment's (ECA), the additional extensive assessment of these risks by a bank is rather of a limited value added.
We would propose to amend the requirement to be only applicable in full if no ECA coverage is available.
• Paragraphs 131 et seqq:

According to para 131 of the Guidelines regarding the analysis of the borrower’s financial position in the field of lending to professionals’ institutions should ensure that the analysis is based on tangible facts and not on an expected significant increase in the borrower’s income unless there is sufficient evidence. According to this requirement it would be impossible to grant a credit to an entrepreneur, who has a convincing new business model, but cannot grant sufficient evidence for his future increase in income.

Against this background we suggest to amend para 131 as follows in order to allow the financing of new business models:
“Institutions should ensure that the analysis of the borrower’s financial position is based on tangible facts and not on an expected significant increase in the borrower’s income unless there is sufficient evidence, or the specific circumstances of the individual case indicate a significant increase in the borrower’s income.”
In general, we understand the rationale of the requirements for lending standards setting. Nevertheless banks define KRIs based on their risk appetite, business plans and risk strategy. Defining a list of mandatory KRIs would ignore the risk appetite, risk strategy and management expertise of the bank. Furthermore, the creditworthiness assessment should be based on a sound internal framework, which is comprehensive and creates a clear structure for individual easements based on their characteristics (market, products, industries). Therefore, as an example, the analysis of financial projections cannot be conducted in a one-size-fits all" approach for all professional clients. A fully harmonized approach would not cover the full spectrum of the heterogeneity of transactions in the market and other relevant legal requirements. Furthermore, in some cases financial projections of the client are not available to the extent required. In particular, stock listed companies are reluctant in principle to explicitly provide financial projections and budgets due to a risk that in case this information is publicly shared, any deviation triggers an ad-hoc announcement to the market. If such information is not provided by the client, we do not view it as meaningful and valuable if the bank itself tries to predict the forward-looking figures for the client. The reliability of such projections is questionable. Therefore in our view, other tools like sensitivity analyses (see para 142-146) of the guideline) or stress scenarios, where relevant, are sufficient to understand the client’s key risks.
We propose to add to the requirement defined in para 132 "where appropriate and/or available". This would consider portfolio- and/or market-specific practices based on the local legal and accounting framework in line with principle of proportionality. As a consequence the ability to apply internal expertise and ensure that certain dynamics are monitored and analyzed regularly, identifying potential adverse developments early on and developing mitigating actions will be retained.
• Paragraphs 133 / 135
Complementary to the comments raised for # 131, the requirements defined in #135 read as a mandatory list of a minimum ratios to be considered in the creditworthiness assessment for all professional clients. However some of these ratios do not represent a meaningful metric for a creditworthiness assessment. For example:
o EBITDA strongly depends on the industry in which the customer operates and is not deemed as an appropriate indicator to compare risk profiles of clients across different industries and within the same client segments (i.e. large corporate);
o Return on equity and capitalization rate are indicators used by investors who seek for different levels of returns on investment depending on their appetite; in practice the benchmark is missing to assess i.e. which level of the return on equity is appropriate to ensure a long-term sustainability and viability of the company; especially now, when more and more companies abandon a singular focus on the interests of shareholders and instead pledged to “deliver value” to all stakeholders and are expected to manage multiple goals, like i.e. innovation, impact on climate change, and look beyond the single-minded focus of the financial bottom line. Moreover these ratios do not provide a meaningful information of the repayment capacity of the borrower as required in i.a. # 127 and #160, which is a key component for a bank deciding if to provide a financing to the client.
In addition, the following ratios only apply to a certain type of facility:
o DSCR: only for project finance
o LTV / LTC: only RE financing
Furthermore, there are some other ratios that allow for better comparability of the client’s risk profile across client segments and therefore have a wider scope of application:
o Equity ratio as an indicator of a balance sheet (capital) structure
Therefore the listed ratios cannot be understood as a minimum that must be applied when assessing the creditworthiness of any client.
We would like to propose two alternatives:
1) New formulation of this requirement that in our view covers the spirit of the intended regulatory expectation, yet allowing the banks to define their own specific lending standards
“Institutions should use in their assessments of borrower’s creditworthiness financial metrics that cover:
i) Profitability;
ii) Indebtedness or leverage;
iii) Balance sheet (capital) structure;
iv) Cash flow;
v) Working capital;
vi) Repayment capacity;
vii) LTV and LTC for secured lending.”
2) Or the following amendment of # 131 to better aligned with the underlying basis for the proportionality principle defined in # 14:
“Institutions, where relevant, use at least the following financial metrics for the purpose of the creditworthiness assessment (…):
a. debt service coverage ratio;
b. EBITDA (earnings before interest, taxes, depreciation, amortisation);
c. interest coverage ratio;
d. loan to value ratio (for secured lending);
e. debt to equity ratio or leverage ratio;
f. loan to cost ratio;
g. return on equity; equity ratio
h. capitalisation rate (net operating income/market value).

• Paragraph 142-146:
Complementary to the comments raised for # 131 et seqq, we consider the requirements defined in this section meaningful only if the client provides the financial projections to the lender. Financial projections are not always provided by every client. As commented above, stock listed companies are reluctant in principle to explicitly provide financial projections and budgets due to a risk that in case this information is publicly shared, any deviation triggers an ad-hoc announcement to the market.
Therefore we deem the requirements set in # 142 ((..) where utilized (…) as meaningful. However the requirements defined in 144, despite the proportionality principle explicitly mentioned in this point, seem to contradict # 142. In addition, the specification set in # 146 seems to be redundant when considering the requirements set in # 142 and 143. Moreover, the events mentioned under #145 are a direct consequence of the events mentioned #146 (e.g. a macroeconomic downturn [#146 a.] triggers a severe decline in borrower’s revenues [which is already covered in #145 a.], etc.)
We propose the following amendment in# 144:
Such sensitivity analysis should account for all general and asset class and product type - specific aspects that may have an impact on the creditworthiness of the borrower. Sensitivity analysis should be proportionate given the purposes, size, complexity, term and potential risk associated with the loan.
We propose the deletion of para 146
• Paragraph 163
This remark applies only if the definition of the CRE remains as currently included in the guideline – also see our comments to Pg 16; #17.
For e.g. social housing „lease length in relation to loan term“ is not a meaningful parameter in our view as although tenants could quit the contract by law, nevertheless due to the market demand, the vacancy rates are negligible. We propose to add "where appropriate" to the point 163.
• Paragraphs 166b / 177b
An assessment of all contactors, builders and architects that participate in the construction is currently not possible, also from the contractual point of view therefore we recommend to add; “where relevant and possible” to these requirements. We propose to add “where appropriate and possible to the extent necessary to reasonably assess the inherent risk”.
• Paragraph 112 (Assessment of borrower’s creditworthiness – other secured lending to consumers)
According to para 112 in relation to loan agreements secured by immovable property, where the property is in a development phase, institutions are required to assess the borrowers project plan, information on builders, architects etc., projection of all costs, permits and certificates for the development. We are of the view that it is the sole responsibility of the customer to assess the building project and not the responsibility of the bank. It would be exuberant to oblige institutions to assess, which legal norms are applicable in relation to a certain building project in order to assess all necessary permits and certificates.
Therefore, we suggest EBA to change para 112 of the Guidelines. Rather than specifying all the items that must assessed according to lit a – d, it could be required in a more general way that institutions have to assess the feasibility of the project.
• Paragraph 126 (Assessment of borrower’s creditworthiness – analyses and assessments for loans to professionals)
According to para 126 banks should at least perform several specific analyses and assessments when carrying out the creditworthiness assessment. The requirement to perform at least the enumerated analyses and assessments is not in line with the principle of proportionality. For example, the requirement in para 126b to analyze the integrity and reputation of the borrower, is not appropriate in relation to small credit facilities. Proportionality should also be reflected in para 132, according to which institutions should at least consider a set of specified aspects when analyzing the financial position of the borrower. For example, the requirement to consider the capacity to meet contractual obligations under possible adverse events should only be applicable, where the loan amount exceeds a certain threshold in relation to the balance sheet.
We suggest implementing exemptions in para 126 and par 132 from the requirements of analyses and assessments that must be conducted in the field of lending to professionals to allow lighter requirements for smaller and less complex credit facilities.
• Paragraphs 145 and 146 (Assessment of borrower’s creditworthiness - sensitivity analysis for loans to professionals)
Para 145 and 146 require institutions to consider a specific set of negative events (idiosyncratic events and market events) when performing the sensitivity analysis. The obligation to consider all those negative events would certainly lead to an overestimation of risk and severely restrict credit granting. It should be clarified that institutions are not obligated to consider all those events in each single case. Rather those sets of negative events should provide a guidance to institutions. When performing a sensitivity analysis, instead of being obliged to consider all the events listed in Para 145 lit a – g and 146 lit a – d in each single case, institutions should consider those events as an exemplary guidance. This would be in line with the EBA’s clarification in Para 144, according to which sensitivity analysis should be proportionate given the purpose, size, complexity, term and potential risk associated with the loan.
Therefore, para 145 and 146 should be amended as follows:
“Institutions should take into account consider the following idiosyncratic/market events as an exemplary guidance:”"

We would like to point out that it is in the EBA´s mandate to take into account ESG factors and therefore we believe that social lending/social banking should receive special treatment under these Guidelines (like it is the case for e.g. project and infrastructure finance or shipping finance). Social banking has specific characteristics that should be reflected in these Guidelines. We would therefore suggest to introduce an own chapter for Social Banking in Section 5.2.
The section on social banking should take the following aspects into account:
There are some banks that serve other purpose than solely a financial success, i.e. improving financial stability and inclusion for people on low income or fostering development and enlarging the impact of social organization. The social banking is an important contributor to the local societies and their financial stability in a long-term. Social banking clients cannot be assessed based on full scope of application of these guidelines. Therefore we would deem it as meaningful either to exclude them from the scope of application or explicitly allow for application of the proportionality principle accordingly. Otherwise some particularly vulnerable client segments (i.e. people at risk of poverty, socially excluded / marginalized groups, minorities, pensioners or disabled people) as well as social organizations (non-profit sector, NGOs, social enterprises) will be threatened by being further excluded from financial services. Moreover, disproportional regulatory requirements could result in higher loan costs for these vulnerable clients or financial exclusion of these segments.
• Paragraph 133
In respect to the requirement to assess the borrower’s capacity of profitably in the future (for borrowers who are unable to generate positive profits over time) it shall be pointed out that particular client groups, i.e. social banking clients will not have any profitability by the very nature of their business and applicable law (i.e. non-for-profit organizations, NGOs). This aspect shall be considered when setting the requirements for lending standards in order to ensure that these organizations with high social impact are not excluded from the financial services. Therefore for these client segments with the primary objective of producing positive and measurable effects for society rather than generating profit for its owners, members and shareholders (e.g. non-for-profit organizations, NGOs or Social Enterprises), the borrower’s repayment capacity is not be made in terms of the retained earnings and equity but the ability of such clients to reallocate their spendings. We propose to amend # 133 as follows:
“In cases where the borrower is unable to generate positive profits over time, institutions should also assess the borrower’s capacity of profitability in the future to measure the impact of retained earnings and hence the impact on equity, where relevant.

• Page 43 paragraph 142-146
In addition, the requirements on a complex sensitivity analysis reflecting potential negative scenarios (combining idiosyncratic and market events) are not deemed meaningful for social banking clients and could result in stricter rejection criteria and exclusion of such clients from the financial services market.
This requirement should be subject to the proportionality principle for social banking clients as proposed above (see Pg 15; #14).
Below please find a drafting suggestion for the separate chapter on social banking, which should be included in the Section 5.2. Assessment of borrower´s creditworthiness:

5.2.x Social banking lending
1. The creditworthiness assessment for social organizations should consider the aspect of non-profit organization and assess the repayment capacity by the ability to decrease costs, create savings or generate additional income.
2. The creditworthiness assessment for other borrower in the segment Social banking should verify the ability and prospect to meet the obligations under the loan agreement. Regular savings (i.e. one year) and future income projections (i.e. related to training, education and qualification programs) can be considered as income surrogate for financially excluded and vulnerable clients.
3. Intuitions are encouraged to consider pro-active support for over-indebted clients. Combined debt advisory services and sustainable restructuring of loans should be considered for over indebted clients, in particular in case the non-performing is due to social causes (i.e. family member death, severe sickness / injury leading to inability to work or natural disaster) as alternative approach to enhanced loan selling activities.
4. Pricing should consider all costs as listed in 187 in chapter 6., but may neglect profitability targets for this customer segment.

General factors such as risk appetite, viability and sustainability are sufficient for the framework of pricing, as it is a basic economical principle for any enterprise. Details should serve as examples only.
In general, we support EBA´s understanding of a comprehensive framework for the pricing of loans. Giving guideline already in the process of pricing enables an accurate measuring and reporting of financial performance of a loan taking into consideration risk appetite and business strategy.
Furthermore, we share EBAs consideration regarding
a) Cost of capital – based on a given rule cost of capital should be allocated to all products to measure their capital consumption.
b) Cost of funding considering the contractual terms and behavioural assumption
c) Costs to be allocated when pricing a new loan. Entities have to make a decision if loans should bear full costs or only product costs. This view has to be fixed in our general rule book. Depending on the costs applied the ROE target in the pricing tool has to be set.
d) Credit risk costs – the application of Standard risk costs fulfil the request of homogenous risk groups / historical experience and application of respective risk models
e) Direct assignment of costs – it is reasonable to link directly assigned cost component to a deal. Regarding recognition of taxes within a pricing tool it has to be decided if the NPAT view on product level is part of the general steering concept on product level or not.
Measuring profitability of new loans with eg Economic Value Added (EVA) supports entities to monitor the contribution of each single loan to the overall profitability.
Ultimately, each single head of a business line is responsible for earning full costs of his/her business unit in order to achieve his/her EVA/ RoRAC targets. Therefore pricing single deals based on a fair cost allocation is a prerequisite to achieve this overall goal and hence we go hand in hand with EBA´s perception of cost allocation on individual loan level.
A regular – at least quarterly- review of post calculation on single deal level has to be done together with Business. Deals/portfolios which did not perform accordingly have to be reviewed and conclusions have to be incorporated in the pricing tool.

We would like to reflect on specific requirements in this chapter:
• Paragraph 193 (Valuation at origination)
According to the Guidelines (para 193) institutions should ensure that the property collateral is valued in accordance with applicable international, European and national standards. These standards often follow specific purposes. One standard’s purpose might be to determine the value, because the property is being sold. Another standard’s purpose might be to determine the property value for a probate proceeding. Hence, some of those standards might not be suited to determine the value for credit purposes. Therefore, we are of the view that those standards should not be applicable in the sense of a binding framework, rather they should be applicable as a general non-binding basis.
We suggest amending para 193 in the following way:
“Institutions should ensure that the property collateral is valued in accordance with applicable international, European and national standards, such as European Group of Valuers’ Associations (TEGoVA) European Valuation Standards and the Royal Institute of Chartered Surveyors (RICS) standards. Those standards should not be binding, rather should they provide a general basis for valuation purposes.”
• Paragraphs 195 and 196 (Valuation at origination)
According to the Guidelines (para 195) institutions should set up policies and procedures specifying the valuation approaches for immovable property used by the valuer. The Guidelines specify in this regard that the usage of desktop and drive-by valuation approaches is only allowed in the cases of valuing and revaluing immovable property collateral that is of similar design, specifications and characteristics to the ones already valued or re-valued. Since the valuer holds the technical expertise, he should decide on a case by case basis, which valuation approach to use. If according to his expertise a desktop or drive-by valuation approach is the most appropriate one, he should not be restricted by the Guidelines to use such an approach.
The Guidelines must ensure that the valuer is granted enough flexibility to decide on a case by case basis according to his expertise, which valuation approach to use.
According to the Guidelines (para 196) institutions should carry out an assessment in terms of the liquidity and enforceability of the collateral including time to recovery, when the repayment capacity of the borrower significantly deteriorates. Since assessments regarding liquidity and (especially) enforceability require efforts and costs, it would be more efficient to carry out these assessments only when the borrower is already in default. This would correspond with the higher probability that the collateral is being realized when the borrower is in default.
For that grounds para 196 should be amended as follows:
“In the case significant deterioration in the repayment capacity of the borrower of a default of payment, institutions should carry out an assessment in terms of the liquidity and enforceability of the collateral including time to recovery.”
• Paragraph 197
Demanding for a pool of external experts for valuation in case the bank wants to use external experts. There are many small and regionally active banks which are unable to provide such pools. The quality of those experts is more important than the sheer number of experts.
• Paragraphs 201 – 206
The requirements for movable property collateral seem to be extensive for banks with small portion of such collateral; esp. the establishment of panels of external valuators and the implementation of advanced statistic models for each and every type of movables seems disproportional to the economic benefit of such a requirement.
A more conservative valuation of such collateral (by applying bigger haircuts, limitation of valuation to defined types and age of the assets, etc.) may compensate such rules.
We would welcome if the rule is amended to allow for an introduction of materiality thresholds above which an expert valuation is to be mandatory.
• Paragraph 214
The requirements for immovable property collateral are meaningful however the rotation obligation for internal valuators shall be reconsidered as is not always practicable, especially in small banks that often have only one internal valuator and does not bring additional risk mitigation (the internal valuators have one superior who is responsible for the quality of their performance); rotation of external valuators is deemed meaningful. We propose to delete the rotation of internal valuators from the requirement.
• Paragraphs 208 and 209 (Monitoring and revaluation)
The Guidelines require institutions to set up policies and procedures to specify the approach and frequency of monitoring of the value of immovable property collateral (para 208, 209). In our view the current provisions of the CRR (Art 208 para 3 CRR) are specifying the monitoring of immovable property collateral sufficiently. Regarding the frequency of monitoring Art 208 para 3 lit a CRR stipulates that institutions should monitor the value of the property on a frequent basis and at a minimum once every year for commercial immovable property and once every three years for residential real estate. Where the market is subject to significant changes in conditions, Art 208 requires institutions to carry out more frequent monitoring. Art 208 para 3 lit b CRR specifies the cases, where the review of the property valuation should be performed by a valuer. Hence, no further specification in institution’s policies and procedures is needed.
Requiring institutions to set up policies and procedures in this regard would cause additional administrative costs for institutions, without providing an equivalent benefit, since the CRR already contains provisions regarding the approach and frequency of monitoring of the value of immovable property collateral. Therefore, the requirements of the Guidelines to specify the approach and frequency of monitoring of immovable property collateral in policies and procedures should be removed.
Since the CRR already contains provisions that are specifying the monitoring of immovable property collateral sufficiently, there is no need for institutions to further set up policies and procedures.
Additionally, we would like to point out that the frequency of the obligations of the borrower to provide the institution with information should be aligned with the frequency of monitoring the value of the collateral in order to facilitate the monitoring process with up-to-date information and to make a monitoring consistent with CRR requirements feasible.
The Guidelines refer to LTV as credit granting criterion. As no calculation methodology is being introduced by the Draft Guidelines, we understand every institution can use its own justified and established calculation methodology.
Moreover, we believe that credit amortisation and development of immovable property should be consider for LTV purposes and the monitoring of the value. As a result, institutions should be able to adopt a lower LTV when the credit was substantially amortised (outstanding loan amount is reduced) and/or a building has been partially constructed (the value of the collateral is increased).
In this vein, Basel III: Finalising post-crisis reforms mentions both situations in its paragraph 62, according to which “modifications made to the property that unequivocally increase its value could also be considered in the LTV” and “When calculation the LTV ratio, the loan amount will be reduced as the loan amortises”.
• Paragraph 214
We advocate for deleting paragraph 214 as there is no indication that rotating valuers improves the quality of the valuation of collateral. Moreover, it should be noted that some institutions employ and rely on one valuer to operate economically. Mandatory rotation would therefore result in disproportionately high costs for institutions without significant benefits regarding the valuation of the immovable collateral.

In eventu, if the rotation of valuers is maintained against advice the rules should at least be less stringent than the ones for auditors, but could be considered as source for a similar softened provision regarding the rotation of the valuer. Instead of creating new and differing rules, the rotation requirement in Article 17 (1) and (7) of Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC should be considered although the valuation of collateral should be less strictly regulated than statutory audit.
“1. A public-interest entity shall appoint a statutory auditor or an audit firm for an initial engagement of at least one year. The engagement may be renewed.
Neither the initial engagement of a particular statutory auditor or audit firm, nor this in combination with any renewed engagements therewith shall exceed a maximum duration of 10 years.
7. The key audit partners responsible for carrying out a statutory audit shall cease their participation in the statutory audit of the audited entity not later than seven years from the date of their appointment. They shall not participate again in the statutory audit of the audited entity before three years have elapsed following that cessation.”
We therefore suggest requirements applicable to valuers should not be more stringent than respective requirements for auditors as statutory audit is a key aspect for the validation of proper management and creditor protection.

Additionally, maintaining the rotation of valuers must be supplemented by a Cooling-Off-period for excluded valuers which should not exceed two years to make their reappointment possible.

Given the current wording Paragraph 224 seems disproportionate and could be adjusted as follows:
“Institutions should assess the performance of the external valuers on an ongoing basis, in particular accuracy of valuations provided. As part of such assessments, institutions should also look at the concentration of valuations performed and variable fees paid to specific valuers.”

• Paragraph 222

According to para 222 of the Guidelines any valuer carrying out the valuation task should be professionally competent and should have at least the minimum educational level that meets any national requirements and accepted professional standards for carrying out such valuations. Since internal valuers have a high expertise, but not always have the same educational level that is requested in the accepted professional standards, this requirement would severely restrict the use of internal valuers. We suggest amending para 222 (a) to allow the use of internal valuers in cases, where though they do not have the required educational level, they have a long-term working experience in the field of valuation.

Hence, para 222 (a) should be amended as follows:
“is professionally competent and has at least the minimum educational level that meets any national requirements and accepted professional standards for carrying out such valuations or has sufficient working experience in the field of valuation;”.

• Monitoring and revaluation (Advanced statistical models)

On page 81 of the Guidelines the EBA generally prohibits the use of advanced statistical models for the initial valuation of immovable property collateral. In practice, advanced statistical models in the form of “reference-value procedures” have just recently been implemented by institutions on the basis of Art 208 CRR to support the valuer, when carrying out a valuation of immovable property. The use of advanced statistical models is in line with the current state-of-the-art and allows a transparent, high quality and cost-efficient valuation. The EBA itself recognizes that “a strict restriction on the use of those models can hamper the development in this market and the overall progress of the valuation market.” Nevertheless, EBA decides to generally prohibit the use of advanced statistical models, since they may create shortcomings in the risk management. In contrast to the EBA’s argument, the practical use of statistical models shows a qualitative increase regarding valuations.
Therefore, the use of advanced statistical models for the initial valuation of immovable property collateral should not generally be prohibited. Rather should their legitimacy be dependent on the type of advanced statistical model being used by an institution. The EBA could allow the use of advanced methods under additional conditions, such as additional controls of property data, or require evidence on the accuracy of such models. In case this evidence is provided by an institution, EBA could grant the use of advanced statistical models. However, a general prohibition to use advanced statistical models for the initial valuation of immovable property collateral is not differentiated enough, since it does not take into account the accuracy and quality of the different advanced statistical models in use.

We would like to reflect on specific requirements in this chapter:
• Paragraph 263
In general we understand and agree with the listed early warning indicators as potentially relevant aspects that should be considered when implementing the EWS framework. However the current wording of this requirement may be understood that all these indicators must be a minimum binding consideration when setting the early warning frameworks. Our comments should be understood under consideration of comments made above for # 14, 131, 132, 135, 142-146 and 163. In our view, the defined requirements do not allow for consideration of the principle of proportionality as needed in this context. In line with the current definition of the principle of proportionality in para 14, the relevant considerations should be based on the size, nature and complexity of the credit facilities. However several of the proposed indicators are not relevant at the credit facility level but need to be considered at the portfolio and/or client level. In addition, several of these indicators strongly depend on the local accounting, market standards and laws, and the extent of the possible data collection (see our comments to the points mentioned above), and therefore their relevancy, strength and correlation to the default may differ across portfolios, industries and clients. For some of the indicators, the data collection my not be possible due to the GDPR and/or information availability constraints. Therefore in our view, similarly to the requirements formulated in other parts of the guideline, relevant proportionality considerations must be properly reflected in relation to the proposed list of the EWS indicators. Moreover the current requirement strongly suggests that the EWS systems should be set up based on several single indicators but in practice there are early warning systems in use that are based on the statistical models and yet fulfill the requirements in regard of the early warning framework. This may strongly influence the efficiency of the early warning (watchlist) process as some manual (human) inputs may be necessary in order to fulfill this expectation, which is not deemed as meaningful and necessary for this purpose.
As a result, we think that the current definition of the regulatory expectations for the early warning framework is unclear and has to be revised in order to avoid confusions.
We propose to add the following proportionality considerations to this requirement defined in this point:
As part of their ongoing monitoring of credit risk institutions should consider the following indicators “to the extent that is proportionate given the relevancy and predictive power of the indicators as well as the potential risk associated with the loan”.
• Paragraph 255 (Stress testing in monitoring framework)

According to para 255 of the Guidelines institutions are required to perform stress tests. Those stress tests should be performed at least annually and at least on the aggregate portfolio level. The requirement to perform stress tests on sub-portfolios is dependent on the relevance of the sub-portfolio. When assessing the relevance of a sub-portfolio institutions should take into account materiality and risk level. A part of that, it is our view that the type of counterparty (consumer or professional) should be taken into account as well, since performing stress tests in the consumer loan segment is exuberant.

Against this background para 255 should be amended as follows:

“Institutions should conduct stress tests at least on the aggregate credit portfolio and on relevant sub-portfolios, taking into account materiality, and risk level and the counterparty (whether it is a consumer or a professional).”

In addition, we want to point out further issues:

• SME-Customers
In many member states, SME is a very important loan segment. The guidelines impose too many details which are either not available for this segment, or not relevant. Many member states encourage SME with various methods, e.g. giving more time for setting up their financial statements. Hence, it has to be clarified that „timely information“ must always be linked to national requirements setting more extensive time horizons.

• Refering to other guidelines
The draft often touches topics already regulated in other guidelines, such as stress testing, ICT, internal governance, connected clients, AML and the like. We are of the opinion that this is creating redundancy. It is therefore sufficient only to refer to specific chapters of other guidelines since they should deal with these topics in accomplished way.

• Single customer view
It is industry standard also to allow for portfolio-analysis based granting of provisional lines of credit (so called „pre-approved limits“) – in this respect rec. 122ff. would narrow the lending process without taking into account certain industry standards.

• Details of creditworthiness assessment
As no difference is done between certain types of products or customer, or in our point of view not sufficiently, items such as „product type-specific metrics“ as in rec. 126 should become mandatory. We have to clearly point out that these metrics are only in use for „specialised lending“ such as project or object finance, but not for plain vanilla products. See also Rec. 135 and 140 in that respect. This example alone shows that the itemisation of the guidelines are going much too far, and are inappropriate for certain loan types. Again, this is not industry standard. The same goes with certain requirements such as multi-year plannning and forecast mentioned in rec. 131 and 142. For SME-customers, it will become very difficult to do this, and the effort will be in no relation to the relatively smaller loans of SME-customers.

In recital 17 of the consultation paper, EBA aims to provide a definition for “Green Lending”.
We advocate for aligning this definition, especially regarding the “environmental criteria” with the legislative work currently under way, in particular the Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 and the Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment and accordingly the work done by the TEG to define technical screening criteria.
A clear reference to the Taxonomy will ensure legal certainty as a definition not in line with the future level 1 definitions would jeopardize the process of developing clear and uniform criteria for what can be defined as “green” in the European Union.