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EBA Draft RTS on Materiality Threshold for Past Due Credit Obligations

Core Content

The European Banking Authority (EBA) has published a draft Regulatory Technical Standard (RTS) on the materiality threshold for past due credit obligations, as required by Article 178(6) of the Capital Requirements Regulation (CRR). This document outlines the framework for setting materiality thresholds to determine whether a credit obligation that is past due is considered material for the purpose of identifying default under the IRB Approach and the Standardised Approach.

Main Objectives

The primary objectives of the draft RTS are:

• Harmonisation of practices: To ensure consistency in risk parameters and capital requirements across institutions and jurisdictions.
• Level playing field: To create equal treatment for institutions throughout the EU.
• Facilitation of cross-border operations: To align supervisory requirements for institutions operating across borders.

The objectives of the materiality threshold are:

• Efficient elimination: Of cases where past due exposures are not due to material credit risk but to other factors.
• Reasonable number of cure cases: To ensure that the threshold allows for a fair number of cases where the borrower can still recover from default.
• Effective and timely identification: Of real, material defaults.
• More accurate risk parameter estimates: To improve the precision of internal risk models.

Key Policy Decisions

Reference Amount

• At the obligor level: The sum of all amounts owed by the obligor that are past due for more than 90 days (or 180 days, if applicable).
• At the facility level: The sum of all amounts of a single credit facility that are past due for more than 90 days (or 180 days, if applicable).

Structure of the Threshold

The threshold is a combination of an absolute and a relative threshold:

• At the obligor level: The relative threshold is set as a percentage of the total credit obligations of the borrower.
• At the facility level: The relative threshold is set as a percentage of the single credit facility.
• An obligor or transaction is considered defaulted if either the absolute or relative threshold is breached.

Level of the Threshold

• Retail exposures: The absolute threshold cannot exceed 200 EUR.
• Non-retail exposures: The absolute threshold cannot exceed 500 EUR.
• Relative threshold: Cannot exceed 2%.

Application of the Threshold

• Competent authorities will set the threshold within 90 days of the RTS publication in the Official Journal of the EU.
• Institutions will then have timelines to implement the threshold, which may vary based on:
  • The method used to calculate capital requirements
  • The number and complexity of rating systems
  • The current materiality thresholds used

Impact Assessment

The impact of the draft RTS on institutions and capital requirements is difficult to assess at this stage, as:

• The levels of the thresholds set by competent authorities are not yet defined.
• The RTS only specifies the criteria, not the actual thresholds.
• The change in the materiality threshold concept could significantly affect institutions, particularly those using the IRB Approach and complex rating systems.
• National supervisors will also face challenges in setting the thresholds and reviewing rating system changes from IRB banks.

Consultation and Next Steps

• Comments on the draft RTS can be submitted to the EBA by 31 January 2015.
• The EBA acknowledges that the draft RTS is slightly delayed, as it was supposed to be submitted by 31 December 2014.
• There is a possibility of aligning the entry into force of the RTS and the related Guidelines to facilitate implementation.

Conclusion

The EBA aims to introduce a harmonised and consistent approach to setting materiality thresholds for past due credit obligations. This will help in ensuring a level playing field for institutions across the EU and improve the accuracy of risk assessments and capital requirements.