EBA harmonises the definition of default across the EU

The European Banking Authority (EBA) published today its final Guidelines specifying the application of the definition of default across the EU and its final draft Regulatory Technical Standards (RTS) on the materiality threshold of past due credit obligations. The EBA also released the results of a quantitative and qualitative impact study (QIS) aimed at assessing the impact on the regulatory capital requirements of selected policy options to harmonise the definition of default used by EU institutions. Both the Guidelines and the final draft RTS will harmonise the definition of default across the EU, thus contributing to improving consistency and comparability of capital requirements.

In particular, the Guidelines clarify all aspects related to the application of the definition of default including the days past due criterion for default identification, indications of unlikeliness to pay, conditions for the return to non-defaulted status, treatment of the definition of default in external data, application of the default definition in a banking group and specific aspects related to retail exposures.

The RTS specify the conditions for setting the materiality threshold for credit obligations that are past due and harmonise the structure and application of the threshold, which will entail an absolute and a relative component. The levels of the threshold will be set by competent authorities and will be subsequently implemented by all institutions in a given jurisdiction. In the case of a relative component of the threshold, the RTS recommend it should be set at 1% unless specific reasons are provided.

The QIS report presents detailed information about the current practices of institutions with regard to key aspects of the definition of default and provides an estimated impact of selected policy scenarios on the capital requirements and capital adequacy ratios of the institutions. The QIS results are the basis for the impact assessment carried out on the Guidelines and the RTS.

Both the Guidelines and the RTS are part of a broader regulatory review of the Internal Ratings Based (IRB) Approach carried out by the EBA as outlined in the Report published on 4 February 2016. However, the harmonised definition of default will apply to all institutions, also those that use the Standardised Approach.

The implementation of the Guidelines and of the RTS is expected at the latest by end-2020 but institutions are encouraged to introduce the necessary changes as soon as possible. In the case of IRB banks, the implementation should be based on individual plans agreed between institutions and their competent authorities, in line with the EBA’s Opinion on the implementation of the regulatory review of the IRB Approach, published on 4 February 2016. The EBA statement and related information is available here.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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