CRR: EBA publishes guidelines and final draft RTS on harmonising the definition of default

The guidelines specify all aspects related to the application of the definition of default of an obligor. The EBA has identified differing practices used by institutions as regards the definition of default and the guidelines set out detailed clarification on the application of the definition, which includes aspects such as:

• the days past due criterion for default identification;
• indications of unlikeliness to pay;
• conditions for a return to non-defaulted status;
• treatment of the definition of default in external data;
• application of the default definition in a banking group; and
• specific aspects related to retail exposures.

The EBA has performed a qualitative and quantitative assessment (QIS) of the potential impact of the guidelines on institutions' capital requirements and has published the final report alongside the guidelines.

The draft RTS relate to the conditions according to which competent authorities should set the materiality threshold for obligations past due. The RTS set conditions in relation to both the structure and the application of the materiality threshold, which will be required to be composed of both an absolute and relative threshold.

The guidelines will apply from 1 January 2021. The EBA expects the RTS to be implemented by end-2020 at the latest, but has recognised that institutions will need sufficient implementation periods to allow changes to be introduced in an efficient manner. For IRB banks, the implementation should be based on individual plans agreed between institutions and their competent authorities.