New denition
of default
What banks need to do by
the end of 2020
Minds made for transforming
nancial services
Contents
Executive summary
Regulatory overview
Key challenges and considerations
What banks should do now
Publications
New DoD on a page
Key contacts and
country representatives
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16
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Following the nancial crisis,
the European Banking Authority
(EBA) has established tighter
standards around the denition
of default (CRR Article 178)
to achieve greater alignment
across banks and jurisdictions.
These need to be implemented
by the end of 2020.
1New denition of default What banks need to do by the end of 2020 |
Executive summary
European regulators have adopted new
detailed standards on how banks need to
recognize credit defaults for prudential
purposes to increase consistency across
countries and banks. The deadline for
compliance is the end of 2020.
Banks that have carried out a
quantitative impact analysis have found
that the new standards can materially
impact the number and timing of
defaults, calling into question the validity
of existing models and processes. The
impact varies signicantly across banks
(depending on approach for estimating
regulatory capital and pre-existing
default denition) as well as across
individual portfolios within the banks.
But where the impact is material it
needs to be reected in updated risk
management and supporting decisions
(e.g., pricing), accounting (e.g., IFRS9,
Effective Interest Rate) and capital
models (IRB and ICAAP).
The guidelines are extensive and
detailed, challenging legacy IT
infrastructure and processes that have
often evolved organically over the years.
For some banks this is an opportunity
to cleanse historical data, refresh and
modernize supporting infrastructure,
and establish the foundation of a more
sustainable data strategy to support
advanced analytics. New processes and
controls also need to be established.
But time is short and the changes,
considered material for all capital
models, require substantial efforts
from both banks and regulators alike.
IRB banks subject to ECB supervision
have already had to submit detailed
impact assessments and implementation
plans as part of the model re-approval
process. All IRB models also need to be
updated to reect additional changes
introduced by the EBA as part of the ‘IRB
repair work’, by the end of 2021. But
progress across the industry is far from
uniform and some national regulators
have been less engaged with the banks
they supervise.
Furthermore, these changes are only
a few among a series of ongoing
challenges, such as rening IFRS9
implementation, meeting ongoing
demands to improve stress testing
capability and implementing Basel III
reforms. This leaves banks, and
supervisors, with a lot to do and little
time to do it.
In this paper we provide a summary
of the new regulation, and highlight
points for consideration based on the
challenges banks have faced so far in
their implementation efforts. At the end
of this paper we also reference a list of
relevant publications and a “New DoD on
a page” summary of the new denition
of default (DoD) standards.
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| New denition of default What banks need to do by the end of 2020
Regulatory overview
What is the new DoD and what does
it mean?
• A new set of standards that are more detailed
and prescriptive, and will have signicant impact
on governance, data, processes, systems and
credit models.
• The impact on capital requirements depends
on several inuencing factors, including type of
approach for estimating capital requirements (IRB or
Standardised Approach), current implemented default
denition and portfolio specics.
• For approved IRB capital models, the new standards
are deemed to be a material change and hence
requiring formal re-approval of a Competent
Authority, irrespective of capital impact.
• All banks need to implement the new standard
by 31 December 2020 for reporting to start
1 January 2021.
What are other relevant publications
to consider?
• New requirements for internal models that must be
developed and implemented by the end of 2021, e.g.,
EBA guidelines for estimating Probability of Default
(PD) and Loss Given Default (LGD); ‘IRB Repair’.
• The broader regulatory reform agenda, specically
Basel III nalization and forthcoming regulation
(CRR2/CRR3), as it impacts the model landscape and
capital beyond 2021.
• Regulations on the denition and/or management
of forborne and non-performing exposures, notably
guidelines from the EBA and the Basel Committee on
Banking Supervision (BCBS).
• The EBA, ECB and NCAs have also published
additional guidance and impact assessments related
to the new DoD.
• See Publications at the end of this paper for an
extended list of references to relevant publications.
Who does it impact?
• All rms subject to the Capital Requirements
Regulation (CRR) and holding capital against
credit activities.
• IRB banks need to recalibrate their credit models but
banks under the Standardised Approach (SA) also
need to identify, use and report defaults according to
the new DoD.
What are the new guidelines?
• European Banking Authority (EBA) guidelines on the
application of the denition of default.
• European Commission (EC) regulation on the
materiality threshold for credit obligations past due.
• National Competent Authorities (NCAs) and ECB have
published their own consultation papers and policies
where the regulation provides national discretion
(materiality thresholds and 180 days past due).
3New denition of default What banks need to do by the end of 2020 |
Summary of the new rules
Materiality thresholds
Introduction of new absolute and
relative materiality thresholds for the
purposes of DPD counting; when both
thresholds have been breached for
90 days, a default has occurred. ECB
and most NCAs have adopted the EBA
RTS thresholds:
• Retail: 1% relative and €100 absolute
• Non-retail: 1% relative and €500
absolute
The notable exception to this being the
PRA in the UK which has adopted a 0%
relative and a zero absolute threshold
for retail exposures to minimize the
operational impact that changing the
widespread practice of determining
90 DPD through a ‘months-in-arrears’
approach would imply. It should be
noted that NCAs outside the Eurozone
have adopted absolute thresholds in
local currency; these have so far been
specied in even amounts broadly
equivalent to €100 and €500. Where
banks apply default at obligor level, they
should ensure materiality thresholds
are also applied at obligor level. Banks
may opt to use lower thresholds
as an additional unlikeliness to pay
trigger (see below).
Past due amount and DPD
counting
The amount past due shall be the sum of
all amounts past due, including all fees,
interest and principal. For the relative
threshold, this amount should be divided
by the total on-balance exposure. In case
the principal is not repaid or renanced
when an interest-only loan expires, DPD
counting should start from that date even
if the obligor continues to pay interest.
There are also specic requirements
for when DPD counting may be
stopped — when the credit arrangement
specically allows the obligor to change
the schedule, when there are legal
grounds for suspended repayment, in
case of formal legal disputes over the
repayment or when the obligor changes
due to a merger or similar event.
Technical default
The standards specify a strict and
limited set of so called technical defaults,
i.e. false positives that are caused by
technical issues; generally data or
system errors, or failures or delays in
recognizing payment.
Removal of 180 DPD
Following the EBA recommendation
to remove the CRR option to use 180
DPD instead of 90 DPD (as applicable
under the rules for residential and SME
commercial real estate and/or exposures
to public sector entities), ECB has
removed this option for Systemically
Important Institutions (SIIs) in the Single
Supervisory Mechanism (SSM) and all
NCAs that have previously exercised
the CRR option to allow 180 DPD have
followed suit.
Factoring and purchased
receivables
Specic requirements for factoring and
purchased receivables; where a factor
does not recognize the receivables on
its balance sheet, DPD counting should
start when the client account is in
debit, otherwise DPD counting should
start from when a single receivable
becomes due.
01
Days past
due (DPD)
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| New denition of default What banks need to do by the end of 2020
Non-accrued status
UTP will be triggered if the credit
obligation is put on non-accrued
status under the applicable accounting
framework.
Specic Credit Risk
Adjustment (SCRA)
Added guidelines on cases where SCRAs
trigger UTP.
Sale of the credit obligation
The sale of a credit obligation needs to
be assessed and classied as defaulted if
the economic loss exceeds 5%.
Distressed restructuring
Concessions extended to obligors with
current or expected difculties to meet
their nancial obligations should be
considered distressed restructurings.
These need to be assessed to establish
materiality; if the net present value
(NPV) of the obligation decreases by
more than 1% (or a lower threshold set
by the institution), the obligation should
be considered defaulted.
Bankruptcy
Clarication on arrangements to be
treated similar to bankruptcy, including
but not limited to all arrangements in
annex A of Regulation (EU) 2015/848
on insolvency proceedings. This includes
not only such arrangements directly
involving the institution but also such
arrangements the debtor has with
third parties.
Additional indications of
unlikeliness to pay
Banks must dene additional UTP
indicators.
The standards specify additional UTP
indications that must be included,
e.g., fraud. The standards also provide
guidance on optional UTP indications to
be considered, e.g., signicant increase
in obligor leverage, signicant delays in
payment to other creditors, etc.
Furthermore, they specify situations
when these and other UTP triggers
should be evaluated, e.g., in the
event the obligor changes the
repayment schedule within the rights
of the contract.
Probation periods
Minimum regulatory probation period
of 3 months for all defaults with the
exception of distressed restructuring,
where a 1 year minimum probation
period applies.
Banks have to monitor the behavior
and nancial situation of the obligor
in probation to support cure after the
probation period expires. There is an
option for banks to apply different
probation periods to different types of
exposures (as long as they meet the
minimum requirement). In case the
defaulted exposure is sold, the bank
needs to ensure the probation period
requirements are applied to any new
exposure to the same obligor.
Monitoring the effectiveness of
the policy
Banks are required to monitor the
appropriateness of their curing policy on
a regular basis, including impact on cure
rates and impact on multiple defaults.
02
03
Unlikeliness
to pay (UTP)
Return to
non-default
status
5New denition of default What banks need to do by the end of 2020 |
External data
When external data is used for the
estimation of risk parameters, the
institution must document the DoD
used in these external data, identify
differences to the institution’s internal
denition, and perform required
adjustments in the external data for any
differences identied, or demonstrate
that such differences are immaterial.
Consistency in the application
of default
Banks must ensure that the default
of an obligor is identied consistently
across IT systems, legal entities within
the group, and geographical locations. If
this is prohibited due to legal limitations
on information sharing, competent
authorities must be notied. Additionally,
for banks using the IRB approach,
they need to assess the materiality
of impact on risk estimates. Where
the development of this capability is
burdensome, banks will be exempt if they
can demonstrate immateriality due to few
shared obligors with limited exposures.
Furthermore, the internal denition of
default must be applied consistently
across legal entities within the group and
across types of exposures, unless the
bank can justify differences on the basis
of different internal risk management
practices or different legal requirements.
Such differences must be clearly
specied and documented.
Level of DoD application and
contagion
The standards provide guidance on DoD
application at facility and/or obligor level
for retail exposures.
Generally, when a credit obligation
defaults which is related to an exposure
where default applies at obligor level, all
other exposures of the obligor should
also default, including those where the
institution applies default at facility level.
When a credit obligation defaults which
is related to an exposure where default
applies at facility level, the institution
should only consider other exposures of
the obligor in default for certain UTPs.
Timeliness of default
identication
Institutions should have automated
processes, where possible, that identify
defaults on a daily basis. Where this
is not possible, manual processes
must be performed frequently
enough to ensure timely identication
of defaults. Delays in recording
defaults must not lead to errors or
inconsistencies in risk management,
risk and capital calculations or internal/
external reporting.
Documentation
Banks must document all their internal
DoDs in use, including associated scope,
and triggers for default and cure. They
also need to keep an updated register
of all historic versions of DoDs used.
Furthermore, banks must document
how the default and cure logic is
operationalized in detail, including
governance, processes, and information
sources for each trigger.
Internal governance
requirements for IRB banks
Additional governance requirements
are introduced for banks using the IRB
approach, e.g., the requirement that
Internal Audit should regularly review
the robustness and effectiveness of the
process of identifying defaults.
04
Other key
changes
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| New denition of default What banks need to do by the end of 2020
7New denition of default What banks need to do by the end of 2020 |
Timeline
EBA publishes
guidance on new DoD
• End of 2015, EBA starts
gathering data for a
quantitative impact study
(QIS) on the new DoD.
• In September 2016, EBA
publishes a report with the
QIS results.
• Together with the QIS
report, EBA publishes
the nalized GL on the
application of the denition
of default and nal draft
RTS on the materiality
threshold for credit
obligations past due.
Start of TRIM
• Beginning of 2017, ECB
starts on-site Targeted
Review of Internal Models
(TRIM) inspections, the
objective of which is to
reduce inconsistencies and
unwarranted RWA variability
between IRB banks.
• BCBS publishes Basel III: post-
crisis reform.
• In November 2017, the
European Commission adopts
regulation on RTS for the
materiality threshold for credit
obligations past due.
• End of 2017, EBA advises
the European Commission to
disallow the application of 180
day past due.
Application step 1 for
banks in the SSM
• In June 2018, ECB contacts
banks in the SSM with
guidance on the process for
implementing the new DoD,
proposing a two-step approach.
• SSM banks prepare their DoD
application package (including
an impact assessment) for step
1, which they have to deliver
by year end under the Two-
Step Approach.
• NCAs publish consultation
papers and policies relating
to EBA’s GL, RTS and Opinion
relating to the new DoD.
• End of 2018, ECB publishes
regulation on materiality
thresholds.
2016 2017 2018
EBA DoD
Publication
SSM 1st step
application deadline
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| New denition of default What banks need to do by the end of 2020
Feedback from ECB
• Early 2019, SSM banks
receive feedback from
ECB on their submitted
application package. A
number of SSM banks are
requested to modify parts
of their self assessment.
• Halfway through 2019,
ECB delivers feedback
on the permission to use
the Two-Step Approach
to SSM banks that have
applied for this. Negative
feedback may result
in exemption from the
Two-Step Approach.
• If SSM banks have received
permission, they will focus
on default denition go-live
(step 1), leaving enough
time to collect one year of
default data under the new
default regime.
New DoD standards
operationalized
• Adjustments to systems
and processes to take into
account the new DoD should
be implemented and taken
into production.
• Banks build up data
history based on the new
DoD to support model
redevelopment.
• Some national regulators
may propose different
timelines for model updates,
e.g., in the UK the PRA latest
consultation has proposed
that residential mortgage
models should be updated
and implemented by the
end of 2020, with other IRB
models due by end of 2021.
This is taking advantage of
the exibility afforded under
the IRB framework under
article 146.
Models updated for
new DoD and IRB
repair changes
• Material models updated
to reect new DoD and
‘IRB repair’ standards by
end of 2021, to go live
from 1 January 2022.
• Models that are no
longer eligible for IRB
under revised Basel III
framework can be
de-prioritized to end
of 2023, or banks can
apply for permanent
partial use.
• Where models have not
been redeveloped or
approved, scalars/capital
buffers may apply.
Basel III go-live
• The revised Standardised
Approach for credit risk
and revised IRB framework
should be implemented as
of 1 January 2022 (Basel
framework timelines).
• The output oor starts at
50% and will increase to
72.5% in 2027.
• Adjustments of business
models to the new
regulatory regime.
2022 and beyond
New DoD basis of reporting
from 1 January 2021
2019 2020 2021
Time until DoD go-live
9New denition of default What banks need to do by the end of 2020 |
Key challenges and
considerations
Jurisdictional alignment
NCA discretions on materiality
thresholds could lead to complexities
for banking groups with cross border
entities in the EU. At this time, we
expect jurisdictional differences to be
limited — the main difference currently
arising in the UK, where PRA has set
zero thresholds for retail exposures to
accommodate the ‘months-in-arrears’
approach to determine 90 DPD defaults.
Similar challenges arise for global banks
that need to decide whether to extend
any changes to current practices in their
EU entities to entities outside of the EU
(including e.g., how to handle materiality
thresholds for portfolios denominated in
different currencies).
Impact assessment
A quantitative impact assessment is an
important step in understanding the
broad implications of the new standards
on the capital position, individual
businesses and associated models. As
such it also informs:
• Policy decisions where some
exibility and choices exist: this
includes adopting lower DPD
materiality thresholds, contagion of
facility level retail exposure defaults
(‘pulling effect’) and other additional
indications of UTP triggers as well as
different probation periods.
• Scalars to ensure capital estimates
reect the new standard for models
that are not redeveloped and
approved by 2021.
• Priorities for model updates.
Banks ideally have the historical data
to assess impacts on level, timing and
duration of defaults, with associated
impacts on cures. Where historical data
is not sufciently rich, banks have to
adopt a range of approaches to support
the analysis, ranging from historical data
cleansing and recasting, to simulation
based approaches or qualitative
assessments. Where the impact cannot
be estimated with a high level of
condence, focus is on accelerating
process updates to collect default data
on the new standards.
Where banks use external data, which is
common for wholesale models, they will
need to demonstrate its consistency with
updated internal standards.
Knock-on impact on the
broader model universe
In the run-up to 2022, a number of
additional regulatory changes (‘IRB
repair’) are being implemented to
capital models together with the new
denition of default standards. These
cover requirements around margins
of conservatism, realized losses, long
run average or hybrid calibration, and
downturn calibration for LGD and EAD.
Regulators are expecting all these
changes to be incorporated in banks’ IRB
remediation programs.
Changes to the denition of default
also impact the broader model stack
across risk, nance and treasury
analytics (e.g., IFRS9, Fund Transfer
Pricing, stress testing), raising important
planning and prioritization challenges
to banks. It also stretches resources
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| New denition of default What banks need to do by the end of 2020
that are already facing substantial
demands from increased model risk
management standards, IFRS9 day 2
activities, CECL implementation (for
some), while progressing with AI and
machine learning strategies, among
other changes. This is prompting some
banks to reconsider the broader model
universe and how it can be simplied,
componentized, and delivered through
more exible technology infrastructure.
Data
The typical approach banks adopt for
data is to recast historical data at least
for a few dates, and to implement the
new standards as quickly as possible
to support collection on the new basis
as a cross check. However, recasting
historical data requires it to be rich and
reliable — for instance on UTP triggers,
forbearance or technical defaults.
Procedural changes over the years can
also lead to signicant difculties in
evaluating historical data according to
the new criteria. While in some cases
reasonable assumptions can be made
to derive good enough proxies to
support the development of scalars or
recalibrated models, this is by no means
a given.
Banks supervised by ECB have typically
started or are about to start data
collection. Banks that have not yet
started might nd that their systems
require substantial updates before they
can collect data and that necessary
resources are already committed on
work that cannot be easily re-prioritized.
Operational changes
Operationalization of the new DoD
typically requires changes to existing
systems and processes.
Examples of typical areas of operational
challenge include:
• DPD counters are not systematically
automated and operate on different
denitions, and treatment of
technical defaults doesn’t have the
necessary rst line controls.
• UTP indicators can currently be
dened broadly and allow a large
degree of personal judgement. The
new standards introduce stricter
UTPs (e.g., specic denition of sale
at a material loss) and will require
stricter controls.
• Return to non-default status requires
the implementation of new cure logic
and controls against various tests for
return to performing.
Business processes typically need to be
changed to support better alignment
and ownership throughout the default
lifecycle, and associated data capture
and audit trail.
Depending on existing processes and
supporting technology, some banks
will nd that these changes can require
signicant time to implement and brand
new solutions to be established, e.g., the
introduction of new workows.
Governance and
documentation
The new standards, in line with trends
over the recent years, require a much
greater level of documentation of
processes and procedures. As well
as robust governance and audit trail,
including a register of all current and
historical default denitions used.
Many banks have found that this is
substantially more than had currently
been in place, and are considering the
adoption of an end-to-end workow
process to provide both robust controls
(including audit trail) and structured data
collection. So banks should consider
in their timeline the time it takes to
build a clear picture of the current
end-to-end process and associated
roles and responsibilities in managing
non-performing exposures throughout
the lifecycle, and technology options
to bring a common workow and data
capture around it.
Finally, the new standards add to
the already extensive expectations
regulators have of the audit function,
who are expected to carry out a regular
review of the bank’s approach to the
new standards.
Capital impact
From a capital planning standpoint,
banks need to consider the potential size
of impacts; these could be signicant for
specic portfolios, particularly for banks
on Foundation IRB, and for portfolios
that will move to F-IRB when the
nalised Basel III reforms go live, as well
as for banks with large gaps to the new
DoD, such as having to shift from a 180
days past due standard to 90 days.
Based on a sample of impact
assessments we have generally observed
11New denition of default What banks need to do by the end of 2020 |
an increase in PDs, mainly due to new
materiality thresholds, which is offset
by a decrease in LGDs from higher
cure rates.
Impacts at individual portfolio level
can also be much more material — it
is not uncommon to observe RWA
impacts in the order of -25% to +25% on
individual portfolios.
The stricter requirements for returning
defaulted exposures to non-default
status is also likely to lead to an increase
in default stocks in the medium term,
with associated impacts on RWA and
impairments.
Business practices
Business stakeholders have a key
role in the program to review the
impact of the new requirements on
customers and/or nancial performance,
and make changes to business
practices accordingly.
From an economic standpoint, the
impacts on capital can vary greatly
from bank to bank and across different
portfolios. A material capital (and/
or IFRS9 impairment) change may
warrant a review of current processes
that are designed to prevent and
recover defaults, or pricing or lending
criteria. This can particularly be the
case in higher risk portfolios where cure
criteria may lead to punitive capital
charges having to be held longer than
is currently the case. Another example
would be the selling of credit obligations,
which, if they trigger default, will be
reected in higher risk estimates than
might currently be the case.
More generally, banks will need to
consider how the new standards
need to be reected in the end to end
‘customer journeys’.
Timeline and implementation
approach
The current end of 2020 timeline looks
challenging for many banks. Updating
internal systems and processes to be
able to collect data on the new DoD
basis and allow some parallel run prior
to reporting ‘go-live’ is a priority. For
banks that are looking to establish the
foundation of a more sustainable data
strategy (e.g., to support advanced
analytics), this might require a phased
implementation.
From a modelling standpoint, the
volume of work is potentially vast. So
close engagement with supervisors and
regulators, and a structured approach
based on a robust impact assessment
and prioritizing redevelopment
for most material and/or impacted
portfolios is key.
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| New denition of default What banks need to do by the end of 2020
Banks are at different stages in their programs — in our experience, SIIs are mostly ahead of the curve,
followed by IRB banks, ahead of SA banks. This follows naturally from the complexity of change and level
of necessary supervisory involvement, but the fact is that the timetable looks challenging for all banks and
the risk for technical debt and RWA inefciencies after 2020 is signicant.
Banks need to progress quickly with their DoD implementation efforts. Key steps include:
What banks should do now
Program
governance
Establish programme governance to provide coordination across policy
decisions, approaches, external communication, and timing of implementation
and reporting. Some banks may also require coordination across multiple
entities and jurisdictions where systems and processes are shared.
Impact
assessment
Assess impact on historical default data to inform policy decisions and
approach to models updates. Broader IT and process impacts also need to be
assessed in detail to allow sufcient lead time to make necessary changes and
to start collecting data on the new basis as early as possible.
Policy
decisions
Dene internal policy and standards, including with regards to available
discretions and jurisdictional discrepancies in the application of the new DoD.
This is ideally informed by the impact assessment, and provides sufcient
guidance for interpretation across models, business lines, and business
processes to be consistent.
IT and process
changes
Implement necessary changes to IT systems and processes, with a view to start
collecting data as early as possible to support the model updates.
Models
Estimate scalars and establish a prioritized plan for model updates, including
other regulatory changes happening ahead of 2021 (e.g., margin of
conservatism), and for changes related to the broader model universe (e.g.,
IFRS9, stress testing etc.).
Regulatory
applications
Banks will seek to prioritize model redevelopment and progressively move
away from the application of scalars and this needs to be managed closely with
the regulators and supervisors.
Parallel run
and reporting
Most banks will be seeking to have a parallel run period for all impacted
reporting, both internal and external.
13New denition of default What banks need to do by the end of 2020 |
Publications
Denition of default
Mar-19
PRA policy statement on the denition of default (PS7/19)
Note: includes materiality thresholds that deviate from those proposed by
the EBA
Nov-18
ECB regulation on the materiality of credit obligations past due ((EU)
2018/1845)
Jun-18
ECB guidance on the process for implementing new denition of default
Note: this was not published but submitted directly to SIIs in the SSM
Dec-17
EBA opinion on the use of the 180 days past due criterion (EBA/
Op/2017/17 )
Oct-17
EC regulation on RTS for the materiality threshold for credit obligations
past due ((EU) 2018/171)
Sep-16
EBA nal draft RTS on the materiality threshold for credit obligations
past due (EBA/RTS/2016/06)
Sep-16
EBA guidelines on the application of the denition of default (EBA/
GL/2016/07)
Sep-16
EBA report on the results from DoD QIS
Mar-16
ECB regulation on the exercise of discretions ((EU) 2016/445)
Note: includes a requirement to use 90 DPD for all exposures, removing the
option for 180 DPD
Jun-15
EC regulation on insolvency proceedings ((EU) 2015/848)
Note: includes a set of arrangements to be considered similar to bankruptcy
under new DoD
Dec-13
EC regulation on RTS for calculating specic and general credit risk
adjustments ((EU) 183/2014)
Jul-13
EBA nal draft RTS on the calculation of specic and general credit risk
adjustments (EBA/RTS/2013/04)
Broader regulatory reform
Dec-17
BCBS publication Basel III: Finalising post-crisis reforms
Apr-16
BCBS report Regulatory consistency assessment programme (RCAP) —
Analysis of RWAs for credit risk in the banking book
14
| New denition of default What banks need to do by the end of 2020
Internal models
Jul-19
EBA progress report on IRB roadmap
Jul-19
ECB guide to internal models — Risk-type-specic topics chapter
Mar-19
EBA guidelines for the estimation of downturn LGD (EBA/GL/2019/03)
Feb-19
EBA guidelines on Credit Risk Mitigation for institutions applying the
IRB approach with own estimates of LGDs (EBA/CP/2019/01)
Nov-18
EBA nal draft RTS on specication of the nature, severity and duration
of an economic downturn (EBA/RTS/2018/04)
Nov-18
ECB guide to internal models — General topics chapter
Mar-18
EBA report on CRM framework
Nov-17
EBA guidelines on PD estimation, LGD estimation and the treatment of
defaulted exposures (EBA/GL/2017/16)
Feb-17
ECB guide for the targeted review of internal models (TRIM)
Jul-16
EBA nal draft RTS on IRB and AMA assessment methodology (EBA/
RTS/2016/03)
Jun-16
EBA nal draft RTS on Risk Weights for specialised lending exposures
(EBA/RTS/2016/02)
May-14
EC regulation (RTS) for assessing material changes of IRB and AMA
approach ((EU) No 529/2014)
Non-performing and forborne exposures
Oct-18
EBA guidelines on management of non-performing and forborne
exposures (EBA/GL/2018/06 )
Apr-17
BCBS guidelines on the prudential treatment of problem assets —
denitions of non-performing exposures and forbearance
Feb-15
EC regulation on ITS with regard to supervisory reporting ((EU)
2015/227)
Jul-14
EBA nal draft ITS on supervisory reporting on forbearance and
non-performing exposures (EBA/ITS/2013/03/rev1)
15New denition of default What banks need to do by the end of 2020 |
Default type Indicator Criteria Additional conditions Default level and contagion
Minimum conditions for return
to non-defaulted status
DPD
(Days past due)
90 DPD
The following conditions are met for an overdue credit obligation:
(1) Total amount overdue is > EUR Y
and
(2) Total amount overdue is > X% of total on-balance exposures
and
(3) Total amount overdue has met conditions (1) and (2) > for 90 consecutive days
and
(4) It is not a technical default
where:
Total amount overdue is the sum of all overdue principal, interest and fees related to the facility, the
obligor (excluding any joint obligations) or the unique set of joint obligors, depending on the level of
default application and credit arrangement
Total on-balance exposure is the total on-balance exposure related to the facility, the obligor (excluding
any joint obligations) or the unique set of joint obligors, depending on the level of default application
and credit arrangement
Y = 100 or different threshold
< 100 per Competent Authority decision for retail exposures
Y = 500 or different threshold
< 500 per Competent Authority decision for corporate exposures
X = 1 or different threshold
≤2.5 per Competent Authority decision
(1) DPD counting should be adjusted
to the new payment schedule (if
applicable) in any of these situations:
(1.1) Repayment is changed,
postponed or suspended by the
obligor in accordance with rights
granted in the contract
(1.2) The obligor has changed due
to merger or acquisition or similar
transaction
(2) DPD counting should be suspended if:
(2.1) Repayment is suspended due
law or legal restrictions
(3) DPD counting may be suspended if:
(3.1) Repayment is subject to
formal dispute
Default should be applied at obligor
level for all exposures except for
retail exposures where default may
be applied at facility level:
(1) For retail exposures where
default applies at obligor level:
(1.1) When a credit obligation
defaults, all other exposures of
the obligor should also default,
including those where the
institution applies default at
facility level
(1.2) When a joint credit
obligation defaults, all other
exposures of the same set of
obligors and of each individual
obligor should also default,
(exceptions apply — see EBA
guidelines)
(1.3) When a company defaults,
all individuals that are fully liable
for the company’s liabilities
should also default
(2) For retail exposures where
default applies at facility level:
(2.1) When a credit obligation
defaults other exposures of
the obligor should not default
unless:
(2.1.1) The institution has
adopted a UTP in line with the
‘pulling effect’
or
(2.1.2) The credit obligation
has defaulted due to a UTP
indicator that has been
classied as reective of the
overall situation of the obligor
3 consecutive months during which no default conditions
are met
This condition also applies to new exposures to the obligor,
in particular if the defaulted exposures have been sold or
written off
UTP
(Unlikeliness
to pay)
Non-accrued
status
The credit obligation is put on non-accrued status (interest stops being recognised in the income
statement due to decreased quality of the credit obligation)
(1) UTP indications should be evaluated
in the event of any of the following
situations (in addition to events
specied by the institution):
(1.1) Repayment has been changed,
postponed or suspended by the
obligor in accordance with rights
granted in the contract
(1.2) Repayment has been
suspended due to or legal
restrictions
(1.3) Concessions have been
extended that do not meet the
conditions of a material distressed
restructuring
(1.4) Purchase or origination of
nancial asset at a material discount
(1.5) One of the obligors of a joint
obligation individually defaults
(1.6) When a company defaults;
owners, partners and signicant
shareholders with limited liability
should be evaluated
(2) Institutions should specify which
UTP indicators reect the overall
situation of the obligor rather than that
of the exposure, and should include (but
is not limited to):
(2.1) Bankruptcy
Specic
Credit Risk
Adjustment
(SCRA)
(1) If the institution uses IFRS9:
(1.1) The credit obligation is classied as Stage 3
and
(1.2) The Stage 3 classication is not triggered by overdue repayment that does not meet the
criteria of a 90 DPD default
or
(2) If the institution uses another accounting framework:
(2.1) A SCRA has been made to the credit obligation
and
(2.2) The SCRA is not IBNR (incurred but not reported)
or
(3) If the institution uses IFRS9 and another accounting framework: it must then choose to consistently
use either (1) or (2)
Sale of the
credit obligation
(1) The credit obligation is sold at an economic loss
and
(2) The sale is credit risk related
and
(3) L > X%, where X is a threshold
≤5% per decision by the institution
where:
L =
E – P
E
L is the economic loss related with the sale of the credit obligation
E is the total outstanding amount of the credit obligation subject to the sale, including interest and fees
P is the price agreed for the sold credit obligation
Distressed
restructuring
(1) Concession have been extended to a debtor facing or about to face nancial difculties, resulting in
a diminished nancial obligation
and
(2) D0 > X%, where X is a threshold
≤1% per decision by the institution
where:
Financial difculties are specied in paragraphs 163-167 and 172-174 of Commission Implementing
Regulation (EU) 2015/227
D0 =
NPV
0 —
NPV
1
NPV
0
D0 is the diminished nancial obligation
NPV
0 is the net present value of the obligation before concessions, discounted using the customer’s
original effective
interest rate
NPV
1
is the net present value of the obligation after concessions, discounted using the customer’s
original effective
interest rate
(1) 12 consecutive months during which no default conditions
are met, counting from the latest of:
(1.1) When concessions where extended
(1.2) When the default was recorded
(1.3) When any grace period in the restructured payment
schedule ended
and
(2) During which a material payment (equivalent to what was
previously past due or written off) has been made by the obligor
and
(3) During which payments have been made regularly according
to the restructured payment schedule
and
(4) There are no past due credit obligations related to the
restructured payment schedule
These conditions also apply to new exposures to the obligor, in
particular if the defaulted exposures have been sold or written off
New DoD on a page
16
| New Denition of Default What needs to be done by 2020
Default type Indicator Criteria Additional conditions Default level and contagion
Minimum conditions for return
to non-defaulted status
DPD
(Days past due)
90 DPD
The following conditions are met for an overdue credit obligation:
(1) Total amount overdue is > EUR Y
and
(2) Total amount overdue is > X% of total on-balance exposures
and
(3) Total amount overdue has met conditions (1) and (2) > for 90 consecutive days
and
(4) It is not a technical default
where:
Total amount overdue is the sum of all overdue principal, interest and fees related to the facility, the
obligor (excluding any joint obligations) or the unique set of joint obligors, depending on the level of
default application and credit arrangement
Total on-balance exposure is the total on-balance exposure related to the facility, the obligor (excluding
any joint obligations) or the unique set of joint obligors, depending on the level of default application
and credit arrangement
Y = 100 or different threshold
< 100 per Competent Authority decision for retail exposures
Y = 500 or different threshold
< 500 per Competent Authority decision for corporate exposures
X = 1 or different threshold
≤2.5 per Competent Authority decision
(1) DPD counting should be adjusted
to the new payment schedule (if
applicable) in any of these situations:
(1.1) Repayment is changed,
postponed or suspended by the
obligor in accordance with rights
granted in the contract
(1.2) The obligor has changed due
to merger or acquisition or similar
transaction
(2) DPD counting should be suspended if:
(2.1) Repayment is suspended due
law or legal restrictions
(3) DPD counting may be suspended if:
(3.1) Repayment is subject to
formal dispute
Default should be applied at obligor
level for all exposures except for
retail exposures where default may
be applied at facility level:
(1) For retail exposures where
default applies at obligor level:
(1.1) When a credit obligation
defaults, all other exposures of
the obligor should also default,
including those where the
institution applies default at
facility level
(1.2) When a joint credit
obligation defaults, all other
exposures of the same set of
obligors and of each individual
obligor should also default,
(exceptions apply — see EBA
guidelines)
(1.3) When a company defaults,
all individuals that are fully liable
for the company’s liabilities
should also default
(2) For retail exposures where
default applies at facility level:
(2.1) When a credit obligation
defaults other exposures of
the obligor should not default
unless:
(2.1.1) The institution has
adopted a UTP in line with the
‘pulling effect’
or
(2.1.2) The credit obligation
has defaulted due to a UTP
indicator that has been
classied as reective of the
overall situation of the obligor
3 consecutive months during which no default conditions
are met
This condition also applies to new exposures to the obligor,
in particular if the defaulted exposures have been sold or
written off
UTP
(Unlikeliness
to pay)
Non-accrued
status
The credit obligation is put on non-accrued status (interest stops being recognised in the income
statement due to decreased quality of the credit obligation)
(1) UTP indications should be evaluated
in the event of any of the following
situations (in addition to events
specied by the institution):
(1.1) Repayment has been changed,
postponed or suspended by the
obligor in accordance with rights
granted in the contract
(1.2) Repayment has been
suspended due to or legal
restrictions
(1.3) Concessions have been
extended that do not meet the
conditions of a material distressed
restructuring
(1.4) Purchase or origination of
nancial asset at a material discount
(1.5) One of the obligors of a joint
obligation individually defaults
(1.6) When a company defaults;
owners, partners and signicant
shareholders with limited liability
should be evaluated
(2) Institutions should specify which
UTP indicators reect the overall
situation of the obligor rather than that
of the exposure, and should include (but
is not limited to):
(2.1) Bankruptcy
Specic
Credit Risk
Adjustment
(SCRA)
(1) If the institution uses IFRS9:
(1.1) The credit obligation is classied as Stage 3
and
(1.2) The Stage 3 classication is not triggered by overdue repayment that does not meet the
criteria of a 90 DPD default
or
(2) If the institution uses another accounting framework:
(2.1) A SCRA has been made to the credit obligation
and
(2.2) The SCRA is not IBNR (incurred but not reported)
or
(3) If the institution uses IFRS9 and another accounting framework: it must then choose to consistently
use either (1) or (2)
Sale of the
credit obligation
(1) The credit obligation is sold at an economic loss
and
(2) The sale is credit risk related
and
(3) L > X%, where X is a threshold
≤5% per decision by the institution
where:
L =
E – P
E
L is the economic loss related with the sale of the credit obligation
E is the total outstanding amount of the credit obligation subject to the sale, including interest and fees
P is the price agreed for the sold credit obligation
Distressed
restructuring
(1) Concession have been extended to a debtor facing or about to face nancial difculties, resulting in
a diminished nancial obligation
and
(2) D0 > X%, where X is a threshold
≤1% per decision by the institution
where:
Financial difculties are specied in paragraphs 163-167 and 172-174 of Commission Implementing
Regulation (EU) 2015/227
D0 =
NPV
0 —
NPV
1
NPV
0
D0 is the diminished nancial obligation
NPV
0 is the net present value of the obligation before concessions, discounted using the customer’s
original effective
interest rate
NPV
1
is the net present value of the obligation after concessions, discounted using the customer’s
original effective
interest rate
(1) 12 consecutive months during which no default conditions
are met, counting from the latest of:
(1.1) When concessions where extended
(1.2) When the default was recorded
(1.3) When any grace period in the restructured payment
schedule ended
and
(2) During which a material payment (equivalent to what was
previously past due or written off) has been made by the obligor
and
(3) During which payments have been made regularly according
to the restructured payment schedule
and
(4) There are no past due credit obligations related to the
restructured payment schedule
These conditions also apply to new exposures to the obligor, in
particular if the defaulted exposures have been sold or written off
17New denition of default What banks need to do by the end of 2020 |
UTP
(Unlikeliness
to pay)
Bankruptcy
(1) The institution has led for
or
(2) The obligor has sought (where this would avoid or delay repayment of the credit obligation)
or
(3) The obligor has been placed in (where this would avoid or delay repayment of the credit obligation)
any of the following arrangements:
(.1) Bankruptcy as recognised in applicable law
or
(.2) Any other arrangement listed in Annex A to Regulation (EU) 2015/848
or
(.3) Any arrangement deemed similar to bankruptcy as specied by the institution based on applicable
law and EBA guidelines
(1) UTP indications should be evaluated
in the event of any of the following
situations (in addition to events
specied by the institution):
(1.1) Repayment has been changed,
postponed or suspended by the
obligor in accordance with rights
granted in the contract
(1.2) Repayment has been
suspended due to or legal
restrictions
(1.3) Concessions have been
extended that do not meet the
conditions of a material distressed
restructuring
(1.4) Purchase or origination of
nancial asset at a material discount
(1.5) One of the obligors of a joint
obligation individually defaults
(1.6) When a company defaults;
owners, partners and signicant
shareholders with limited liability
should be evaluated
(2) Institutions should specify which
UTP indicators reect the overall
situation of the obligor rather than that
of the exposure, and should include (but
is not limited to):
(2.1) Bankruptcy
Default should be applied at obligor
level for all exposures except for
retail exposures where default may
be applied at facility level:
(1) For retail exposures where
default applies at obligor level:
(1.1) When a credit obligation
defaults, all other exposures of
the obligor should also default,
including those where the
institution applies default at
facility level
(1.2) When a joint credit
obligation defaults, all other
exposures of the same set of
obligors and of each individual
obligor should also default,
(exceptions apply — see EBA
guidelines)
(1.3) When a company defaults,
all individuals that are fully liable
for the company’s liabilities
should also default
(2) For retail exposures where
default applies at facility level:
(2.1) When a credit obligation
defaults other exposures of
the obligor should not default
unless:
(2.1.1) The institution has
adopted a UTP in line with the
‘pulling effect’
or
(2.1.2) The credit obligation
has defaulted due to a UTP
indicator that has been
classied as reective of the
overall situation of the obligor
3 consecutive months during which no default conditions
are met
This condition also applies to new exposures to the obligor,
in particular if the defaulted exposures have been sold or
written off
Additional
indications
of unlikeliness
to pay
The credit obligation meets criteria that the institution has dened for additional indications of
unlikeliness to pay, which should or may directly trigger default, or trigger a case-by-case assessment
of default (depending on indicator):
(1) Such indicators should include:
(1.1) The institution uses an accounting framework under which:
(1.1.1) The credit obligation is recognised as impaired even if no SCRA has been assigned
and
(1.1.2) The impairment is not IBNR (incurred but not reported)
(1.2) Credit fraud
(1.3) Rules for contagion in the occurrence of default in a group of connected clients
(1.4) In case of purchase or origination of a nancial asset at a material discount:
(1.4.1) Rules for assessing any deteriorated credit quality of the obligor
(2) Such indicators may include (but are not limited to):
(2.1) Same criteria as DPD default category but with institution dened thresholds that are lower
than those dened by the CA
(2.2) The obligor’s source of income to repay loan is no longer available
(2.3) There are justied concerns about the obligor’s ability to generate stable and sufcient cash ows
(2.4) The obligor’s leverage has increased signicantly
(2.5) Breach of the covenants of a credit contract
(2.6) Collateral has been called by the institution
(2.7) Default of a company fully owned by the obligor, where the obligor has provided a personal
guarantee for that company’s obligations
(2.8) ‘Pulling effect’ in line with the ITS with regard to supervisory reporting ((EU) 2015/227)
with the same or different threshold
(2.9) The obligation is reported as non-performing under Commission Implementing Regulation
(EU) 680/2014
(2.10) Signicant delays in payments to other creditors
(2.11) A crisis in the sector of the obligor combined with a weak position of the obligor
(2.12) Disappearance of an active market for an asset because of the nancial difculties
of the obligor
(2.13) In case concessions have been extended that do not meet the conditions of a material
distressed restructuring:
(2.13.1) Large lumpsum payment at the end of the repayment schedule
(2.13.2) Signicantly lower payments at the beginning of repayment schedule
(2.13.3) Signicant grace period at the beginning of the repayment schedule
(2.13.4) The exposures to the obligor have been subject to distressed restructuring more than once
Notes:
1. New DoD on a page is intended as a quick reference guide for the basic logic of the new denition and does not cover the entire regulatory scope; in
particular, it does not cover requirements related to external data, default consistency and governance
2. All default indicators apply to all credit obligations toward the institution, the parent undertaking and its subsidiaries
For an A2–version of New DoD on a page please download it from our website at www.ey.com/NewDenitionOfDefault.
18
| New denition of default What banks need to do by the end of 2020
UTP
(Unlikeliness
to pay)
Bankruptcy
(1) The institution has led for
or
(2) The obligor has sought (where this would avoid or delay repayment of the credit obligation)
or
(3) The obligor has been placed in (where this would avoid or delay repayment of the credit obligation)
any of the following arrangements:
(.1) Bankruptcy as recognised in applicable law
or
(.2) Any other arrangement listed in Annex A to Regulation (EU) 2015/848
or
(.3) Any arrangement deemed similar to bankruptcy as specied by the institution based on applicable
law and EBA guidelines
(1) UTP indications should be evaluated
in the event of any of the following
situations (in addition to events
specied by the institution):
(1.1) Repayment has been changed,
postponed or suspended by the
obligor in accordance with rights
granted in the contract
(1.2) Repayment has been
suspended due to or legal
restrictions
(1.3) Concessions have been
extended that do not meet the
conditions of a material distressed
restructuring
(1.4) Purchase or origination of
nancial asset at a material discount
(1.5) One of the obligors of a joint
obligation individually defaults
(1.6) When a company defaults;
owners, partners and signicant
shareholders with limited liability
should be evaluated
(2) Institutions should specify which
UTP indicators reect the overall
situation of the obligor rather than that
of the exposure, and should include (but
is not limited to):
(2.1) Bankruptcy
Default should be applied at obligor
level for all exposures except for
retail exposures where default may
be applied at facility level:
(1) For retail exposures where
default applies at obligor level:
(1.1) When a credit obligation
defaults, all other exposures of
the obligor should also default,
including those where the
institution applies default at
facility level
(1.2) When a joint credit
obligation defaults, all other
exposures of the same set of
obligors and of each individual
obligor should also default,
(exceptions apply — see EBA
guidelines)
(1.3) When a company defaults,
all individuals that are fully liable
for the company’s liabilities
should also default
(2) For retail exposures where
default applies at facility level:
(2.1) When a credit obligation
defaults other exposures of
the obligor should not default
unless:
(2.1.1) The institution has
adopted a UTP in line with the
‘pulling effect’
or
(2.1.2) The credit obligation
has defaulted due to a UTP
indicator that has been
classied as reective of the
overall situation of the obligor
3 consecutive months during which no default conditions
are met
This condition also applies to new exposures to the obligor,
in particular if the defaulted exposures have been sold or
written off
Additional
indications
of unlikeliness
to pay
The credit obligation meets criteria that the institution has dened for additional indications of
unlikeliness to pay, which should or may directly trigger default, or trigger a case-by-case assessment
of default (depending on indicator):
(1) Such indicators should include:
(1.1) The institution uses an accounting framework under which:
(1.1.1) The credit obligation is recognised as impaired even if no SCRA has been assigned
and
(1.1.2) The impairment is not IBNR (incurred but not reported)
(1.2) Credit fraud
(1.3) Rules for contagion in the occurrence of default in a group of connected clients
(1.4) In case of purchase or origination of a nancial asset at a material discount:
(1.4.1) Rules for assessing any deteriorated credit quality of the obligor
(2) Such indicators may include (but are not limited to):
(2.1) Same criteria as DPD default category but with institution dened thresholds that are lower
than those dened by the CA
(2.2) The obligor’s source of income to repay loan is no longer available
(2.3) There are justied concerns about the obligor’s ability to generate stable and sufcient cash ows
(2.4) The obligor’s leverage has increased signicantly
(2.5) Breach of the covenants of a credit contract
(2.6) Collateral has been called by the institution
(2.7) Default of a company fully owned by the obligor, where the obligor has provided a personal
guarantee for that company’s obligations
(2.8) ‘Pulling effect’ in line with the ITS with regard to supervisory reporting ((EU) 2015/227)
with the same or different threshold
(2.9) The obligation is reported as non-performing under Commission Implementing Regulation
(EU) 680/2014
(2.10) Signicant delays in payments to other creditors
(2.11) A crisis in the sector of the obligor combined with a weak position of the obligor
(2.12) Disappearance of an active market for an asset because of the nancial difculties
of the obligor
(2.13) In case concessions have been extended that do not meet the conditions of a material
distressed restructuring:
(2.13.1) Large lumpsum payment at the end of the repayment schedule
(2.13.2) Signicantly lower payments at the beginning of repayment schedule
(2.13.3) Signicant grace period at the beginning of the repayment schedule
(2.13.4) The exposures to the obligor have been subject to distressed restructuring more than once
3. Special conditions apply to factoring arrangements and purchased receivables
4. Conditions related to the 180 days option have been excluded given that this option is being disallowed
19New denition of default What banks need to do by the end of 2020 |
20
| New denition of default What banks need to do by the end of 2020
Key contacts and
country representatives
Country representatives
Key contacts
Lionel Stehlin
T: +44 20 7951 2432
E: lst[email protected]y.com
Nicolai Molund
T: +44 20 7197 7071
E: nicolai.molund@uk.ey.com
Thorsten Stetter
T: +49 711 9881 16374
E: thorsten.stetter@de.ey.com
21New denition of default What banks need to do by the end of 2020 |
United Kingdom
Richard Brown
T: +44 20 795 15564
E: rbrown2@uk.ey.com
Switzerland
André Dylan Kohler
T: +41 58 286 3378
E: andre-dylan.kohler@ch.ey.com
Nordics
Pehr Ambuhm
T: +46 8 52059682
E: pehr.ambuhm@se.ey.com
Italy
Giuseppe Quaglia
T: +39 2722 122 429
E: giuseppe[email protected]y.com
Ireland
Cormac Murphy
T: +353 1221 2750
E: cormac.murph[email protected]y.com
Belgium
Frank De Jonghe
T: +32 2 774 9956
E: frank.de.jonghe@be.ey.com
Poland
Pawel Preuss
T: +48 225577530
E: pawel.preuss@pl.ey.com
Austria
Heiner Klein
T: +43 1 21170 1443
E: heiner.klein@at.ey.com
Germany
Max Weber
T: +49 711 9881 15494
E: max.weber@de.ey.com
France
Jean-Michel Bouhours
T: +33 1 46 93 51 61
E: jean.michel.bouhours@fr.ey.com
Netherlands
Wimjan Bos
T: +31 88 40 71719
E: wimjan.bos@nl.ey.com
Luxembourg
Olivier Marechal
T: +352 42 124 8948
E: olivier.mar[email protected]y.com
Spain
Ignacio Medina
T: +34 915727579
E: ignacio.medina@es.ey.com
Portugal
Rita Costa
T: +35 1217912282
E: rita.costa@pt.ey.com
Central Eastern Europe
Tomáš Němeček
T: +420 731 627 149
E: tomas.nemecek@cz.ey.com
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