EBA Provides Final RTS and Guidelines on the Definition of Default under CRR

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On September 28, 2016, the European Banking Authority (“EBA“) published final reports on the documents relating to the definition of default under Article 178 of the Capital Requirements Regulation (Regulation 575/2013) (“CRR“):

  • Guidelines on the application of the definition of default under Article 178 (EBA/GL/2016/07) – the guidelines clarify all aspects related to the application of the definition of default, which is used for the purpose of both the internal ratings based approach (IRB approach) and for the standardized approach. The guidelines apply from January 1, 2021, although the EBA is encouraging firms to implement relevant changes in their internal procedures and IT systems before that date.
  • Draft regulatory technical standards (RTS) on the materiality threshold for credit obligations past due under Article 178 (EBA/RTS/2016/06) – Article 178 specifies that a default shall be considered to have occurred when an obligor has past more than 90 days on any material credit obligation to the firm, the parent undertaking or any of its subsidiaries. The draft RTS, which were mandated by Article 178(6) of the CRR, specify the conditions according to which a competent authority should set the materiality threshold for credit obligations that are past due.

The EBA has also published a report setting out the results of a qualitative and quantitative impact study (“QIS“) that assessed the impact on the regulatory capital requirements of selected policy options to harmonize the definition of default. The EBA states that the results of the QIS are the basis for the impact assessment carried out on the guidelines and the draft RTS.

The EBA consulted on these draft RTS and guidelines in October 2014 and September 2015 respectively (see Legal updates, EBA consults on draft RTS on materiality threshold of credit obligation past due and EBA consults on draft guidelines on application of default definition under CRR). According to an EBA press release, they form part of the EBA’s broader regulatory review of the internal ratings based (IRB) approach announced in February 2016.