18 December 2015

BCBS: Guidance on credit risk and accounting for expected credit losses

This guidance, which should be viewed as complementary to the accounting standards, presents the Committee's view of the appropriate application of ECL accounting standards. It provides banks with supervisory guidance on how the ECL accounting model should interact with a bank's overall credit risk practices and regulatory framework, but does not set out regulatory capital requirements on expected loss provisioning under the Basel capital framework.

The failure to identify and recognise increases in credit risk in a timely manner can aggravate underlying weaknesses in credit quality, adversely affect bank capital adequacy, and hinder appropriate risk assessment and control of a bank's credit risk exposure. The bank risk management function's involvement in the assessment and measurement of accounting ECL is essential to ensuring adequate allowances in accordance with the applicable accounting framework.

This supervisory guidance is structured around 11 principles:

- Supervisory guidance for credit risk and accounting for expected credit losses

Principle 1: A bank’s board of directors (or equivalent) and senior management are responsible for ensuring that the bank has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances in accordance with the bank’s stated policies and procedures, the applicable accounting framework and relevant supervisory guidance.

Principle 2: A bank should adopt, document and adhere to sound methodologies that address policies, procedures and controls for assessing and measuring credit risk on all lending exposures. The measurement of allowances should build upon those robust methodologies and result in the appropriate and timely recognition of expected credit losses in accordance with the applicable accounting framework.

Principle 3: A bank should have a credit risk rating process in place to appropriately group lending exposures on the basis of shared credit risk characteristics.

Principle 4: A bank’s aggregate amount of allowances, regardless of whether allowance components are determined on a collective or an individual basis, should be adequate and consistent with the objectives of the applicable accounting framework.

Principle 5: A bank should have policies and procedures in place to appropriately validate models used to assess and measure expected credit losses.

Principle 6: A bank’s use of experienced credit judgment, especially in the robust consideration of reasonable and supportable forward-looking information, including macroeconomic factors, is essential to the assessment and measurement of expected credit losses.

Principle 7: A bank should have a sound credit risk assessment and measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk and to account for expected credit losses.

Principle 8: A bank’s public disclosures should promote transparency and comparability by providing timely, relevant and decision-useful information.

- Supervisory evaluation of credit risk practices, accounting for expected credit losses and capital adequacy

Principle 9: Banking supervisors should periodically evaluate the effectiveness of a bank’s credit risk practices.

Principle 10: Banking supervisors should be satisfied that the methods employed by a bank to determine accounting allowances lead to an appropriate measurement of expected credit losses in accordance with the applicable accounting framework.

Principle 11: Banking supervisors should consider a bank’s credit risk practices when assessing a bank’s capital adequacy.

Full press release

Full guidance

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