The EBA consults on draft amended Guidelines on the application of the definition of default under the Capital Requirements Regulation

The European Banking Authority (EBA) today launched a public consultation on its draft amended  Guidelines on the application of the definition of default under the Capital Requirements Regulation (CRR). As part of its commitment to financial stability, transparency, and consistency, the EBA is proposing to maintain the existing 1% threshold for net present value (NPV) loss in debt restructuring. This approach reflects a careful balance between flexibility for institutions and the need to uphold robust risk management standards. The consultation runs until 15 October 2025. The proposal to retain the 1% threshold is based on three key considerations:The current framework is already flexible and risk-sensitive, allows effective restructuring without misclassifying defaults, and is aligned with established accounting principles. Maintaining consistency with existing prudential standards helps safeguard the progress made in reducing non-performing loans and prevents regulatory arbitrage. A stable threshold supports reliable credit risk modelling, ensuring accurate capital and provisioning assessments across portfolios under both IRB and IFRS 9. To allow for more proactive debt restructuring and reduce the potential burden on debtors, the EBA is considering a shortened probation period from 1 year to e.g. 3 months for certain forborne exposures. The draft amended Guidelines, however, do not incorporate this change, also because it would widen the gap between the definition of...