EUROPEAN UNION: EBA Consults on Harmonised Definition of Default

Wednesday September 23 2015

On 22nd September 2015, the European Banking Authority (EBA) launched a consultation on its draft Guidelines specifying the application of the definition of default. The work is in line with an EBA Discussion Paper on the topic published earlier in the year which described the EBA`s upcoming work on improving consistency and comparability in capital requirements. The consultation runs until 22 January 2016 and the EBA is also asking the public for feedback on a Quantitative Impact Assessment (QIS) of the Guidelines.

The EBA Guidelines launched for public consultation harmonise the definition of default across the EU prudential framework, which will in turn improve consistency in the way EU banks apply regulatory requirements to their capital positions. A detailed clarification of the definition of default and its application is provided in these Guidelines, which cover key aspects, such as the days past due criterion for default identification, indications of unlikeliness to pay, conditions for the 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 with retail exposures.

The tools provided in the Guidelines will allow for increased comparability of own funds requirements, as well as for a reduction in the variability of the risk estimates under the Internal Ratings-Based (IRB) approach. As indicated in its Discussion Paper on the IRB approach, which was published earlier this year and received broad support from the EU banking industry, the EBA believes that a regulatory review of the IRB models will strengthen the confidence in the IRB approach in the EU banking sector.

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