Gap analyses have been commissioned, webinars attended, and internal workshops held — with terms like “EBA Loan Origination and Monitoring (LOaM) alignment”, “Non-Performing Exposures (NPE)” and “Definition of Default (DoD)” tossed around the room like confetti.
But, the question remains: to what extent are EBA gap analyses tested against the actual standards set by the EBA, as opposed to being based on local regulatory frameworks or established national practices?
The truth is, what may be acceptable from a local regulatory perspective (e.g. under Dutch Wft, BGfo, TRHK or AFM guidance) does not automatically comply with the EBA guidelines or satisfy the European Central Bank’s expectations.
ECB supervisors assess compliance based on direct adherence to EBA guidelines, not local custom or regulations. And relying on local practices as justification for divergence is increasingly seen as insufficient — or even as a red flag — during supervisory reviews.
Let us consider a few examples.
- Affordability and Pension Income: When assessing affordability, it remains standard practice among Dutch lenders — in line with local legislation (article 2(5) of the TRHK) — to only take an often-lower future pension income into account if the applicant is expected to retire within the next ten years. Consequently, if the applicant’s retirement date lies beyond this ten-year horizon — for example, twelve years from now — any (typically lower) post-retirement income is excluded from the affordability calculation.
However, EBA LoaM guidelines (art 104) clearly state:
“If the loan term extends past the borrower’s expected retirement age, institutions and creditors should take appropriate account of the adequacy of the borrower’s likely source of repayment capacity and ability to continue to meet obligations under the loan agreement in retirement”.
This means that if pension income becomes relevant in year twelve — or even year twenty — of a thirty-year loan term, it must be factored into the affordability assessment — even if the applicant’s retirement still feels like a distant prospect. Relying solely on national practice or regulatory carve-outs is not compliant with the EBA guidelines and is not considered sufficient from a European supervisory perspective. Moreover, invoking the principle of proportionality as a blanket justification for non-alignment is increasingly rejected by the Supervisor — particularly when it lacks a clear, documented risk-based rationale and does not demonstrably achieve the same supervisory outcome.
- Valuations and Property Monitoring: Many institutions proudly refer to the use of NWWI and NRVT-registered valuers as evidence of objectivity and reliability in their valuation processes. While such frameworks contribute to structure and consistency, they do not in themselves meet the full scope of EBA requirements. The EBA guidelines explicitly call for institutions to maintain an internal panel of valuers, perform regular valuation backtesting, and implement independent quality control procedures. Without these additional layers, institutions fall short of supervisory expectations.
In addition, ECB supervisory guidance imposes stricter standards for newly built properties or those under renovation. This includes, for example, the requirement for more frequent (on-site) valuation updates during the construction or renovation phase, and enhanced documentation of progress inspections. Merely relying on the use of a construction deposit as a mitigating measure is considered insufficient by the ECB, as it does not replace the need for proper collateral valuation and risk monitoring during the build or renovation phase.
Local practice vs. European expectation
The examples above illustrate a broader pattern: EBA guidelines and ECB supervisory expectations tend to be more stringent than national legislation or prevailing market practices. In many instances, the European Central Bank has taken a firm and consistent position — national regulatory deviations or local customs do not override more strict European-level requirements.
While this may appear stringent or even unfair from a local perspective, the underlying rationale is straightforward: to ensure regulatory consistency, comparability across Member States, and enhanced consumer protection.
For lenders who have grown accustomed to relying on national conventions, this creates a regulatory reality check. Practices that may be fully accepted — or even endorsed — at the national level may fall short when viewed through the lens of European supervisory standards. Institutions must therefore be prepared to go beyond minimum local requirements and align their frameworks, controls and interpretations with the letter and spirit of European regulation.
Indirect Exposure, Direct Impact
Even if your institution does not fall under direct ECB supervision, you might not be immune to its influence. If you rely on funding lines or investment mandates from for example investment banks or funds that are subject to ECB supervision, then their compliance obligations cascade down to you. Investors increasingly demand that underlying assets — such as mortgage or consumer loan portfolios — meet EBA and ECB standards, including around underwriting, monitoring, and NPE/DoD management. In practice, this means that your risk policies, processes, and documentation must be EBA and ECB-proof.
Another Issue We See in the Market: Knowledge Gaps in the First Line
An increasingly visible issue in the market is the knowledge gap within the first line of defence. While the EBA Guidelines — particularly those related to LOaM, NPE, and DoD — are also designed to guide first-line activities, this is often where familiarity with these guidelines is lacking.
These guidelines are not abstract supervisory theory; they are also intended to shape the day-to-day decisions made by staff who originate, monitor, and manage credit exposures. And yet, paradoxically, it is precisely in the first line where we observe the lowest awareness or understanding of these (prudential) requirements.
In contrast, functions such as Special Servicing or Arrears Management teams often demonstrate a high degree of awareness and implementation of more conduct-focused requirements, such as those derived from AFM guidance. This disconnect — whereby the first line is tasked with both prudential and conduct-related responsibilities, but shows significantly more awareness and training in conduct supervision (e.g. AFM guidance) than in prudential standards (such as EBA NPE or DoD) — creates a false sense of control. Such asymmetry in regulatory implementation within the same line of defence is a structural vulnerability.
Prudential and conduct requirements are not mutually exclusive. When the operational execution of loan origination and monitoring is disconnected from prudential principles, institutions risk breaching supervisory expectations and undermining sound credit risk management.
Risk Management and Compliance Can Be Interesting (Really!)
Here’s the good news: bridging the gap between conduct and prudential requirements isn’t just about avoiding regulatory breaches. It also leads to better outcomes for both staff and clients. We’ve seen first-hand that training frontline staff to understand both perspectives improves decision-making, boosts job satisfaction, and—yes—makes the work more meaningful. Understanding why a loan must be classified as NPE doesn’t just tick a box. It helps staff support clients more effectively and anticipate supervisory expectations.
Beyond ticking the compliance box
At Fortrum, we bring hands-on experience in interpreting and implementing EBA guidelines in a way that fits your organisation—without cutting corners. Our approach combines regulatory know-how, practical training, and a touch of reality. We won’t just tell you what the regulation says, we’ll work with your teams to embed it in daily practice.
Whether you’re a bank, lender, or servicer, we’re here to ensure that your “gap” analysis doesn’t just tick the box—but actually closes it. In doing so, we go even beyond ticking the compliance box and actively contribute to building a more financially resilient society.
