On September 28, 2016, the EBA published the final Guidelines specifying the application of the definition of default in relation to the Internal Ratings Based Approach and the Standardized Approach under the CRR. The CRR sets out the definition of default of an obligor that is used for the purposes of the IRB and Standardized Approaches. The purpose of the Guidelines is to harmonize the definition of default across the EU framework so that EU banks apply regulatory requirements to their capital positions in a more consistent and comparable way, especially in the context of IRB models. The Guidelines expand on various aspects of the application of the definition of default including the "days past due" criterion for default identification, indications of unlikeliness to pay, specific aspects of the application of the definition of default for retail exposures, application of the default definition in a banking group, treatment of external data and criteria for a return to non-defaulted status. The EBA expects that this harmonization will help reduce the burden of compliance for cross-border groups, reducing overall risk-weighted asset variability across firms. The definition of default impacts own funds requirements under the IRB Approach and the Standardized Approach. In the context of the IRB Approach, the definition of default will influence risk weights and expected loss calculation for both defaulted and non-defaulted exposures. The definition of default under the Standardized Approach forms the basis for the categorization of exposures to the class of exposures in default in line with the CRR provisions on default exposures. The Guidelines will only come into force once they have been translated into the official languages of the EU. The EBA acknowledges that implementation of the Guidelines may take significant resources for certain firms, particularly those firms that apply the IRB Approach and where the default definition will significantly affect their existing approach. Therefore, the EBA has set the application date of the Guidelines to January 1, 2021. However, national regulators have discretion to accelerate implementation of the Guidelines.

The Guidelines are available at: http://www.eba.europa.eu/documents/10180/1597103/Final+Report+on+Guidelines+on+default+definition+%28EBA-GL-2016-07%29.pdf

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