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EBA Data Collection Exercise Summary

Core Content

The EBA (European Banking Authority) conducted a data collection exercise in November 2015 to gather feedback on the proposed regulatory changes regarding the Definition of Default. The exercise included both qualitative and quantitative questionnaires, with the goal of assessing the impact of the new policy options on banks' risk management practices and capital requirements.

The consultation focused on several key areas:

• Specific Credit Risk Adjustments (SCRA)
• Distressed Restructuring
• Pulling Effect
• Materiality Thresholds
• Contagion Effect
• Recovery Rate Calculation
• Probation Period
• Reporting of QRREs (Quantitative Risk Reduction Exposure)

Main Policy Options and Their Implications

1. Specific Credit Risk Adjustments (SCRA)

• Scope: SCRA applies only to banking book exposures and is not applicable to trading book.
• Definition of Default: Exposures with losses due to credit impairment or events affecting significant exposures (whether individually or collectively assessed) are considered as an indication of unlikelihood to pay.
• Impact on QIS: The SCRA policy option is not tested in the quantitative part of the QIS but is assessed in the qualitative questionnaire.

2. Distressed Restructuring

• Default Classification: All exposures classified as “non performing forborne” should be treated as defaulted.
• Scope: This policy option is not subject to QIS.
• Contagion Rules: The Consultation Paper specifies contagion rules only for retail portfolios when the definition of default is applied at the obligor level. For institutions using the facility-level definition, contagion rules do not apply.

3. Pulling Effect

• Application: The pulling effect applies only to retail exposures where the definition of default is at the individual credit facility level.
• Obligatory Status: It is not obligatory for institutions to apply the pulling effect, but it may be considered as an additional indication of unlikelihood to pay.
• Impact on QIS: The pulling effect is not tested in the quantitative part of the QIS.

4. Materiality Thresholds

• Thresholds: The materiality threshold for retail exposures is 200 EUR, and for non-retail exposures is 1000 EUR.
• Relative Limit: A 2.5% relative limit applies to non-retail exposures.
• Exchange Rate: The exchange rate as of 30 June 2015 should be used for converting materiality thresholds to Sterling Pounds.
• Impact Calculation: When testing the materiality threshold, all other default triggers should be removed to ensure isolation of the policy option's effect.

5. Contagion Effect

• Definition: Contagion refers to situations where the default of one obligor influences the default of another.
• Scope: Applies only to retail exposures when the definition of default is at the obligor level.
• Implementation: Institutions should report the impact on their retail portfolio in the qualitative questionnaire and separately for each exposure class in the quantitative part.

6. Recovery Rate Calculation

• Timeframe: Recovery rate is calculated based on the time series data used by the institution, not the short timeframe between 1st January 2013 and 31st December 2013.
• Methodology: Institutions may use observed recovery rates as of 30 June 2015 or parameters from internal LGD models.
• Scope: The recovery rate must reflect both secured and unsecured parts of non-cured facilities.

7. Probation Period

• Duration: The probation period is at least 3 months from the moment the obligor is no longer past due more than 90 days and no other indications of unlikelihood to pay apply.
• Default Status: The probation period allows for reclassification to non-default if the obligor improves its credit quality.
• Calculation: The probation period is added to the default period to determine the total duration of the default event.

8. QRREs (Quantitative Risk Reduction Exposure)

• Reporting: QRREs should be reported according to COREP classification and QIS instructions, without splitting into subcategories such as cards and personal current accounts.
• Thresholds: The 200 EUR threshold for retail and 1000 EUR for non-retail exposures apply.

Key Information

• The QIS is not designed to test all policy options, only those explicitly mentioned.
• For each policy option, institutions are required to assume ceteris paribus (all other factors remain constant).
• The overall effect of all policy options should be reported in the last row of the QIS template, under the section “Implementing all the policy options listed above.”
• Institutions are advised to consult the EBA website for submitting specific comments on the consultation paper.
• The data collection must be completed by December 2015 due to regulatory timelines.
• The probation period and materiality thresholds are critical in determining the default status and recovery rates.

Summary of Responses

This summary captures the key aspects of the EBA data collection exercise and outlines the regulatory changes, implementation requirements, and impact assessments for the proposed definition of default.