EBA欧洲银行-Final-Report-on-Guidelines-on-default-definition-28EBA-GL-2016-0729_107页_1mb

EBA Guidelines on the Application of the Definition of Default (EBA/GL/2016/07)

Executive Summary

The EBA has issued guidelines on the application of the definition of default under Article 178 of the Capital Requirements Regulation (CRR). These guidelines aim to harmonise the approach across institutions and jurisdictions, ensuring consistent application of the default definition for both the Internal Ratings-Based (IRB) Approach and the Standardised Approach. The harmonisation is expected to increase comparability of risk estimates and own funds requirements, and reduce the compliance burden for cross-border groups.

The guidelines address several key areas:

• Days past due criterion for default identification
• Indications of unlikelihood to pay
• Treatment of the default definition in banking groups
• Use of external data
• Return to non-defaulted status

The implementation of these guidelines will take effect from 1 January 2021, with a phase-in period to allow institutions time to adjust their systems and processes. The EBA encourages early implementation to build necessary time series data.

Core Content

1. Definition of Default

• Article 178 of the CRR defines default, which is used in both the IRB and Standardised Approaches.
• The EBA has been mandated to provide guidelines to ensure a consistent application of this definition across the EU.
• The guidelines cover all aspects of the default definition, including:
  • Identification criteria
  • Indications of unlikelihood to pay
  • Conditions for returning to non-defaulted status
  • Treatment of external data
  • Application in banking groups

2. Harmonisation and Impact

• The guidelines aim to reduce variability in risk-weighted assets (RWA) across institutions.
• A qualitative and quantitative impact assessment was conducted, indicating that while the overall capital requirement may not change significantly, the impact varies across institutions.
• Institutions using the IRB Approach that rely on a different default definition will need to make significant adjustments, including updating rating systems and IT infrastructure.

Main Aspects of the Guidelines

2.1 Implementation of Changes

• Institutions may need significant time and resources to implement the new default definition.
• A phase-in period is proposed to allow for a smooth transition.
• Additional guidance is provided to support the implementation process.

2.2 Past Due Criterion

2.2.1 Counting of Days Past Due

• Harmonisation is primarily achieved through the RTS on materiality threshold.
• If a client changes the payment schedule under contractual rights, the new schedule should be used for counting.
• Disputes that are formally resolved (e.g., court or arbitration) may allow for a suspension of days past due.
• Technical past due situations are defined, which do not constitute actual defaults:
  • Errors in data or systems
  • Payment system failures
  • Delayed processing of payments within the institution
  • Factoring arrangements where no receivable is past due for more than 30 days

2.2.2 Materiality Threshold

• The materiality threshold is specified in the RTS and is used to identify technical delays.
• Institutions may use lower thresholds as additional indicators of unlikelihood to pay.
• The threshold must be applied in line with the RTS conditions.

2.2.3 Sovereign and Public Sector Exposures

• Special treatment is provided for central governments, local authorities, and public sector entities.
• Default should not be recognised unless the delay exceeds 180 days, and no other indications of financial difficulty exist.
• Institutions should aim to set realistic repayment schedules to avoid over-identification of defaults.

2.2.4 Factoring and Purchased Receivables

• Clarification is provided on how factoring arrangements are treated:
  • If receivables are recorded on the balance sheet, they are subject to the days past due criterion.
  • If only the factoring account is recorded, it is treated as past due when the advances exceed the agreed percentage.
• Dilution risk is separate from default risk and should not be considered as default events.

2.3 Indications of Unlikelihood to Pay

2.3.1 Specific Credit Risk Adjustments (SCRA)

• SCRA are considered as indicators of unlikelihood to pay.
• SCRA based on losses from credit impairment (Article 1(5)(a) and (b) of Delegated Regulation 183/2014) are treated as indications of default.
• IBNR losses (Article 1(5)(c)) are not considered as indications of default, as they do not reflect a decline in credit quality of specific exposures.

2.3.2 Sale of Credit Obligations

• A material economic loss from the sale of credit obligations may indicate default.
• The reason for the sale and the loss must be assessed.
• If the loss is not related to credit risk, the sale should not be considered as an indication of default.

2.3.3 Distressed Restructuring

• A distressed restructuring is an indication of unlikelihood to pay if it results in diminished financial obligations.
• The diminished obligation is assessed by comparing the present value of cash flows before and after restructuring.
• A threshold is applied to determine if the restructuring results in a default.
• Stage 2 under IFRS 9 is not considered as default unless other indicators are present.

2.3.4 Bankruptcy and Similar Protection

• The concept of bankruptcy and similar protection is clarified to ensure consistent application.
• All arrangements listed in Annex A of Regulation (EU) 2015/848 are treated as similar to bankruptcy.

2.3.5 Additional Indications

• Institutions are encouraged to include additional indicators in their internal procedures.
• These may include:
  • Group-related factors (e.g., relationships between connected entities)
  • Large balloon payments
  • Significantly higher repayment burden
  • Multiple restructurings
  • Significant grace periods

2.4 Application in External Data

• The requirements for external data apply only to institutions using the IRB Approach.
• Institutions must ensure that external data is homogeneous and representative of their portfolio.
• If there are differences between internal and external definitions, institutions should apply conservative adjustments.

2.5 Return to Non-Defaulted Status

• The probation period is specified to ensure a prudent reassessment of the obligor's ability to repay.
• The minimum probation period is 3 months from the date the obligor is no longer past due for more than 90 days and there are no other indications of unlikelihood to pay.
• Institutions may apply longer probation periods based on the type of exposure.
• If the institution still considers the obligation unlikely to be repaid, the exposure should remain classified as defaulted.

Key Information

• Effective Date: 1 January 2021
• Phase-In Period: Provided to facilitate implementation
• Impact: May vary significantly across institutions
• Purpose: To ensure consistency, comparability, and harmonisation in default identification
• Compliance Deadline: Two months after publication of translated guidelines

These guidelines are intended to support regulatory consistency and enhance risk assessment across the EU banking sector.