The PRA has today published its consultation paper (CP) 17/18 on the definition of default. The CP follows the European Banking Authority’s (EBA) Opinion on the implementation of the regulatory review of internal rating based (IRB) models.
The EBA put together a list of regulatory products for the IRB framework review, with the “aim of reducing unwarranted variability in the risk weighted assets (RWAs) calculated using banks’ IRB models.” The regulatory products were based on mandates specified in Regulation No 575/2013 on prudential requirements for credit institutions and investment firms, or the EBA’s own work.
There are three regulatory products, which relate to the definition of default. They are:
- The regulatory technical standard (RTS) for the materiality threshold for credit obligations past due;
- The Guidelines on the application of the definition of default; and
- An EBA Opinion on the use of the 180 days past due criterion in the days pasts due component of the definition of default.
The CP sets outs the PRA’s proposed approach to implementing these three products.
CRR definition of default
Article 178 of the Capital Requirements Regulation (CRR) sets out the definition of default, as well as the events that have to take place for a default to occur.
What is the PRA proposing?
The PRA’s proposals relate to:
- setting materiality thresholds for retail and non – retail exposures;
- removing its discretion to use 180 days instead of 90 days in the days past due’ component of the definition of default for exposures secured by residential or SME commercial real estate in the retail exposure class and/or exposures to public sector entities (PSEs); and
- introducing an expectation that firms comply with the Guidelines when applying the CRR definition of default.
The proposals should be implemented by 31 December 2020 to align with the EBA’s view that changes in these areas should be finalised by the end of 2020.
The CP, which can be found here, closes on Monday 29 October 2018.