PRA consults on credit risk and CRR definition of default

On 27 July 2018, the PRA published a consultation paper on credit risk and the definition of default (CP17/18) (Consultation Paper), setting out its proposed approach to implementing the European Banking Authority (EBA)’s regulatory publications relating to the definition of default in the Capital Requirements Regulation (CRR).

With the objective of reducing variance in the risk weighted assets calculated under the internal ratings based (IRB) approach, the EBA has recently published two items which relate to the definition of default: the regulatory technical standards for the materiality threshold for credit obligations past due (RTS) and the Guidelines on the application of the definition of default (Guidelines). The EBA has also published an opinion on the use of the 180 past due criterion in the days past due component of the CRR definition of default (Opinion).

In the Consultation Paper, the PRA proposes to implement the RTS, Guidelines and Opinion through: (i) updating its expectations in its supervisory statement on IRB approaches (SS11/13) and (ii) amending 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.

The specific proposals include:

• setting a 0% relative materiality threshold and zero absolute materiality threshold for retail exposures;
• setting a 1% relative materiality threshold and a sterling equivalent of €500 absolute materiality threshold for non-retail exposures;
• removing 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
• introducing an expectation that firms comply with the Guidelines when applying the CRR definition of default.

The consultation is open for comments until 29 October 2018 and the proposed implementation date for the proposals is 31 December 2020.