22 January 2016

EBF response to EBA consultation on the Guidelines on the application of the definition of default under Article 178 of Regulation 575/2013

Key messages of European Banking Federation response are:

• Sufficient time needs to be ensured for the implementation given the significance of the envisaged changes to banks systems and processes;
• A  dialogue  with  the  industry  should  be  established  in  developing  the Application Guidelines as the pros and cons of possible application methods need to be thoroughly analysed;
• Default should be triggered only for reasons that are directly linked to the credit risk of the counterparty;
• Defaults related to exposures that are disputed or waived or that are not related to the decrease in the quality of the credit risk should be considered technical defaults;
• Possibility to net the past due exposure with the available margin should be introduced;
• Specific treatment should be introduced for public entities;
• Given that the wording “significant perceived decline in credit quality” as an indication of unlikeliness to pay might be misleading and wrongly equated with the stage 2 of IFRS 9, the Guidelines should clarify that classification in stage 2 should not be considered as an indication of default;
• Introduction  of  only  an  absolute  materiality  threshold  for  retail  exposures  risks an undesirable impact in particular on SMEs portfolios. A 4% threshold, both for retail and non-retail, would be more appropriate as already stated in the previous EBF position paper on this topic. The relative threshold should be implied only when the relative amount exceeds the absolute thresholds of EUR 200 for retail and EUR 1000 for non-retail exposures;
• The sale of credit obligations should be associated with other indicators of unlikeliness to pay and not as a stand-alone criterion. Introduction of a threshold is considered inappropriate. The threshold should be removed to avoid restricting the selling activity and liquidity of financial markets;
• The  threshold  for  calculation  of  the  diminished  financial  obligation as  proposed  in  the QIS should also be revisited. The relevant measure for recognition of default should be set at a level, when the new cash flow (NPV) would no longer be adequate to cover the value at origination of the obligation, regardless of the decline in NPV;
• The  suggested  probation  periods  are  considered  too  long  in  relation  to  both  large corporate exposures and retail consumers in particular when applied together with the strict definition of the technical default as proposed in the CP. The institutions are best placed to recognize when a customer is no longer in default. The probation period should be set in a way that minimizes the “re-defaults” of the clients.

Full response

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