11

Definition of default

11.A1

When applying the definition of default in CRR Article 178, the PRA expects firms to comply with the EBA’s Guidelines on the application of the definition of default (EBA/GL/2016/07).

Identification of obligors

11.1

The PRA expects that if a firm ordinarily assigns exposures in the corporate, institution or central government and central bank exposure classes to a member of a group substantially on the basis of membership of that group and a common group rating, and the firm does so in the case of a particular obligor group, the firm should consider whether members of that group should be treated as a single obligor for the purpose of the definition of default set out in CRR Article 178(1).

11.2

The PRA would not expect a firm to treat an obligor as part of a single obligor under the preceding paragraph if the firm rated its exposures on a standalone basis or if its rating was notched. (For these purposes a rating is notched if it takes into account individual risk factors, or otherwise reflects risk factors that are not applied on a common group basis.) Accordingly, if a group has two members which are separately rated, the PRA would not expect that the default of one would necessarily imply the default of the other.

Days past due

11.3

Under CRR Article 178(2)(d) the PRA is empowered to replace 90 days with 180 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, as well as exposures to public sector entities (PSEs).

11.4

The PRA does not expect to replace 90 days with 180 days in the days past due component of the definition of default for any exposure class.

Unlikeliness to pay: use of materiality thresholds

11.4A

The PRA expects firms to use a lower materiality threshold than that set by the PRA[4] as an indicator of unlikeliness to pay for non-retail exposure classes, if the lower threshold is a more relevant indication of default. When using a lower materiality threshold, firms should ensure compliance with paragraph 34 of the EBA’s Guidelines on the application of the definition of default (EBA/GL/2016/07).

Footnotes

  • 4. Rule 6.1 of the Credit Risk Part of the PRA Rulebook.

Unlikeliness to pay: distressed restructuring

11.5

Firms should comply with paragraphs 49 to 55, 72, 73 and 107 of the EBA Guidelines on the application of the definition of default (EBA/GL/2016/07), which cover the treatment of distressed restructuring as an unlikeliness to pay criterion.

(CRR Article 178(3)(d))

Return to performing status

11.6

In order to be satisfied that a firm complies with the documentation requirements set out in CRR Article 175(3) the PRA expects that a firm should have a clear and documented policy for determining whether an exposure that has been in default should subsequently be returned to performing status. Firms should also comply with Chapter 7 of the EBA Guidelines on the application of the definition of default (EBA/GL/2016/07), which covers the return to non-defaulted status.

(CRR Article 175(3))

Application of materiality thresholds to banking groups with cross-border entities

11.6A

Rule 6.1 of the Credit Risk Part of the PRA Rulebook requires a firm to apply the PRA’s materiality thresholds to all of its exposures on a UK individual solo level and, if applicable, UK consolidation group level. When applying materiality thresholds at a solo level, overseas subsidiaries of UK firms are expected to apply the relevant local thresholds. However, the PRA expects firms to apply for a rule modification[5] to modify rule 6.1 in order to also apply local thresholds for these overseas subsidiaries at the UK consolidation group level where, taking into account the local market characteristics, economic conditions, and financial risk, it would be more appropriate to apply the local thresholds than the PRA’s thresholds.[6] In respect of certain jurisdictions, the PRA may make available a ‘modification by consent’ and, if so, would provide details of the modification on the PRA’s website. The PRA expects that firms apply for the modification for all jurisdictions in which the local thresholds are more appropriate, and not only those jurisdictions for which they expect the use of local thresholds to reduce capital requirements. Firms should provide supporting information about the appropriateness of local thresholds for all waiver applications.

Footnotes

  • 5. Under section 138A of the Financial Services and Markets Act 2000.
  • 6. This also applies to a scenario where UK firms operate in other jurisdictions, such that it is a UK firm with an exposures in a different jurisdiction.