On 27 July 2018, the PRA published Consultation Paper 17/18: the definition of default (CP17/18). In CP17/18 the PRA proposes to update its expectations in Supervisory Statement 11/13: Internal Ratings Based approaches to implement the European Banking Authority’s (EBA) regulatory products that relate to the definition of default. The PRA also proposes to amend the Credit Risk Part of the PRA Rulebook to set thresholds for determining whether a credit obligation is material for the purpose of the Capital Requirements Regulation’s (CRR) definition of default.
Specifically, the policy proposals set out in CP17/18 are to:
- set a 0% relative materiality threshold and zero absolute materiality threshold for retail exposures;
- set a 1% relative materiality threshold and a sterling equivalent of €500 absolute materiality threshold for non-retail exposures;
- remove the PRA’s exercise of the 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; and
- introduce an expectation that firms comply with the EBA’s guidelines on the application of the definition of default.
The deadline for comments on CP17/18 is 29 October 2018.