Credit risk: the definition of default

Consultation paper 17/18
Published on 27 July 2018

Overview

In this Consultation Paper (CP), the Prudential Regulation Authority (PRA) sets out its proposed approach to implementing the European Banking Authority’s (EBA’s) recent regulatory products relating to the definition of default in the Capital Requirements Regulation (575/2013) (CRR).

The EBA has developed a roadmap of regulatory products (‘EBA roadmap’) with the aim of reducing unwarranted variability in the risk weighted assets (RWAs) calculated using banks’ Internal Ratings Based (IRB) models. Two of the products from the EBA roadmap relate to the definition of default: the Regulatory Technical Standards (‘the RTS’) for the materiality threshold for credit obligations past due and the Guidelines on the application of the definition of default (‘the GL’). This CP sets out the PRA’s proposed approach to implementing these three products.

The proposals are relevant to UK banks, building societies and PRA-designated UK investment firms. 

Summary of proposals

The PRA proposes to update the PRA’s expectations in Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ to implement the EBA’s regulatory products that relate to the definition of default (see Appendix 1). 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 CRR’s definition of default (see Appendix 2).

Responses and next steps

In accordance with the EBA Opinion on the implementation of the regulatory review of the IRB Approach, the EBA roadmap should be implemented by 31 December 2020. The proposed implementation date for all of the proposals in this CP is also 31 December 2020.

This consultation closes on Monday 29 October 2018. The PRA invites feedback on the proposals set out in this consultation. The PRA would particularly value firms’ own estimates of the impact of the proposals. Please address any comments or enquiries to CP17_18@bankofengland.co.uk.

The PRA also intends to publish a second CP on the PRA’s proposed implementation of the remaining aspects of the EBA roadmap: the Guidelines on probability of default (PD) estimation, loss given default (LGD) estimation and the treatment of defaulted exposures; and the RTS on specification of the nature, severity and duration of an economic downturn. The second CP will be published after the EBA has finalised the relevant regulatory products.

PDFConsultation paper 17/18

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