Global banking regulators have proposed new guidance for banks that sets out how they are expected to account for expected credit losses.

The Basel Committee on Banking Supervision (BCBS) Monday issued guidance for consultation, based on 11 principles, that details supervisory expectations for banks relating to sound credit risk practices when implementing and applying an accounting framework for expected credit losses (ECL).

The committee notes that an ECL accounting framework reflects the fact that credit quality deteriorates far earlier than actual losses materialize. And, it says that these frameworks also have to factor in forward-looking information and macroeconomic factors, which means that they cannot rely exclusively on current conditions and historical data.

“The financial condition of a bank is highly sensitive to rapid increases in credit risk. Therefore, appropriately determining how, when and in what amount to recognize the effects of increases in credit risk should be a priority for all bank stakeholders,” the committee notes.

The proposed new guidance sets out supervisory expectations for how an ECL accounting framework should interact with a bank’s overall credit risk practices and the regulatory framework. The committee says that those expectations are consistent with relevant accounting standards. And, it also presents the committee’s view of the application of those accounting standards, including circumstances in which the committee expects internationally active banks to limit their use of particular simplifications and/or practical expedients that are allowed under the accounting standards.

The new guidance will replace guidelines that were issued by the Basel Committee back in 2006, which was based on the incurred-loss model of accounting. The committee says that its revised guidance “aims to promote high-quality, robust and consistent implementation of ECL accounting frameworks across all jurisdictions.”

Comments on the proposals published today are due by April 30.