Tightening of EU Valuation Guidelines

European Banking Authority (EBA) has recently released a set of new and more restrictive guidelines on loan origination and monitoring. In this interview, managing director Bernd Holst explains the impact these rules will have on ship valuation from 2021 onward.

Weselmann News: What is the rationale behind the new and more restrictive guidelines from the EBA and what do banks have to prepare for?

Holst: The aim of the revision is to further improve credit quality in the banks, in order to find a more sustainable way of dealing with possible future financial crises. This is why the new EBA requirements regarding valuation guidelines are much more precise than in the past. There is far less scope for interpretation or room for maneuver.

 

Does this apply to all banks?

Holst: At present the guidelines only apply to banks monitored by the EBA, i.e. banks under ECB supervision. But this is set to change in the near future as EU member states are likely to incorporate the new regulation into national law. In Germany, for instance, the minimum requirements for risk management (MaRisk) will be adapted in line with the EBA guidelines. This will eventually make the guidelines mandatory for all banks.

 

And when will this be?

Holst: The new guidelines were published and became effective at the end of May 2020 already. Their application follows a timetable – for new loan agreements, they will take effect from 30th June 2021, for alterations of existing loan agreements the deadline is 30th June 2022. And from 30th June 2024 the guidelines apply to all loan agreements.

 

Who currently supplies vessel valuations to banks and how transparent is the process?

Holst: In order to comply with external and internal requirements of the credit sourcing process, banks typically commission valuations from national and international valuators, usually sale and purchase brokers. The valuation certificates normally only give an estimate of the vessel’s value and possibly the one-year time charter rate and an estimation of the operating costs (OPEX). Customarily no further explanation is given and it is not shown how the given value was arrived at. Likewise, valuation certificates in their present form do not tend to contain a detailed description of the vessel nor any statement as to condition and quality.

 

And what are the requirements that will gradually come into force from next year?

Holst: In the future, the valuation certificates required by banks will need to be a lot more comprehensive. Valuators will need to document in a clear and transparent manner how the value estimates were derived. In addition, they will need to provide a detailed description of the asset and give their informed opinion on building quality and state of maintenance of the vessel as well as on the market environment in which the vessel is operating.

 

What do these changes mean for ship financing banks?

Holst: The banks will need to pay much closer attention to the vessels they intend to finance or have financed.  Beyond that, they will need to make sure prior to entering into a mortgage agreement that the vessel in question is in compliance with all safety and environmental regulation. It is also indispensable to realistically estimate the vessel’s remaining economic life. When financing newbuilding projects banks will need to ensure much more than before that the cash flow and project planning of the borrower is realistic.

 

What expertise can you offer to banks in this respect?

Holst: As independent experts we have many years of experience in vessel valuation, estimation of charter rates and OPEX as well as all aspects of maritime technology. For some financial institutions we have been providing the information that the ECB is now requiring for years already. So what the ECB is now asking for is really nothing new for us.

 

With this know-how my team and myself would like to support ship financing banks as they strive to comply with the new guidelines, especially trying to minimise their workload as efficiency is becoming ever more a priority in financial institutions.

Your Contact

Bernd Holst