Basel unit issues credit risks guidelines

MANILA, Philippines – The Basel Committee has issued guidance on credit risk and accounting for expected credit losses. The document replaces the committee’s sound credit risk assessment and valuation for loans published in 2006.

Comprising 11 principles, the guidance sets out supervisory expectations for banks relating to sound credit risk practices associated with implementing and applying an expected credit loss (ECL) accounting framework.

Among these principles, three provide guidelines for supervisory evaluation of credit risk practices, accounting for expected credit losses and the related supervisor’s assessment of a bank’s capital adequacy. The document is intended to set out guidelines on accounting for expected credit losses regardless of the applicable accounting standards.

The move to ECL accounting frameworks by accounting standard setters is an important step forward in addressing the weakness identified during the financial crisis that credit loss recognition was too little, too late.

The development of ECL accounting frameworks is also consistent with the April 2009 call by the G20 Leaders for accounting standard setters to “strengthen accounting recognition of loan loss provisions by incorporating a broader range of credit information.”

This document sets out supervisory guidance on sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting frameworks.

The move to ECL accounting frameworks by accounting standard setters is an important step forward in resolving the weakness identified during the recent financial crisis that credit loss recognition was too little, too late.

It is also consistent with the April 2009 call by G20 leaders for accounting standard setters to “strengthen accounting recognition of loan loss provisions by incorporating a broader range of credit information”.

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.