The Capital Requirements Regulation (CRR) establishes the definition of default of an obligor that is used for the purpose of the IRB Approach and for the Standardised Approach for credit risk. However, in the absence of specific rules in this regard, the EBA has identified differing practices used by institutions when applying the definition of default.
In this context, the EBA published in September 2016 the following documents:
Both the Guidelines and the RTS will harmonise the definition of default across the EU.
Along with these documents, the EBA published the results of a Quantitative Impact Study (QIS) aimed at assessing the impact on the regulatory capital requirements of selected policy options to harmonise the definition of default.
This document prepared by the R&D area of Management Solutions analyses the requirements arising from the Guidelines and the RTS, and also an assessment of the implications for institutions.
On the one hand, the guidelines clarify aspects related to the past due criterion, the indications of unlikeliness to pay, the criteria for the return to a non-defaulted status, etc. On the other hand, the RTS specify the conditions that competent authorities shall apply when setting the materiality threshold.
Credit institutions and investment firms (institutions) under the scope of the CRR, with regard to the definition of default used for the purpose of the Standardised Approach for credit risk and the IRB Approach.
Guidelines on the application of the definition of default:
RTS on the materiality threshold:
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