The European Banking Authority (EBA) has published a Consultation Paper on draft guidelines on the application of the definition of default under the Capital Requirements Regulation (CRR).

Article 178 of the CRR specifies the definition of default of an obligor that is used for the purpose of the internal ratings-based (IRB) approach and the standardised approach. Article 178(7) CRR mandates the EBA to specify guidelines on the application of this article.

The EBA has in the past identified differing practices used by the institutions as regards the definition of default. The draft guidelines provide detailed clarification on the application of the definition of default, which the EBA considers necessary as this harmonisation will ensure a consistent use of the definition. As a result the draft guidelines will increase comparability of risk estimates and own funds requirements, especially when using IRB models, and will help reduce the burden of compliance for cross-border groups.

The EBA expects that the implementation of these draft guidelines may have a significant impact on the operations of some institutions, in particular for those that use the IRB approach. Where the default definition will change significantly, the implementation of the necessary adjustments may require some time.

The deadline for comments to the Consultation Paper is 22 January 2016. During the consultation period the EBA is also planning to carry out a quantitative impact assessment in order to assess the impact of the proposed requirements both in quantitative and qualitative manner.

View EBA consults on harmonised definition of default, 22 September 2015