EBA updates Guidelines on “in-default” definition

The European Banking Authority has adopted targeted amendments to its default Guidelines under Article 178 CRR, aiming to preserve prudential robustness while introducing limited operational adjustments.

Key changes:

▪️ Factoring arrangements
The exceptional treatment for purchased receivables has been expanded: the invoice-level past due threshold in factoring arrangements increases from 30 to 90 days past due.

The EBA states that this better reflects the economic reality of factoring business models and purchased receivables.

▪️ 1% NPV threshold maintained for distressed restructuring
The Guidelines keep the existing 1% net present value (NPV) loss threshold for debt restructuring.

The EBA rejected proposals to increase the threshold, arguing that:
▸ the current framework is already sufficiently flexible and risk-sensitive;
▸ restructuring can already be designed without triggering losses (e.g. maturity extensions);
▸ increasing the threshold could weaken NPL reduction efforts after the financial crisis;
▸ higher thresholds could create arbitrage opportunities and inconsistencies with the 1% past-due materiality thresholds;
▸ weaker default identification would affect prudential (IRB) and potentially IFRS 9 models, impacting capital and provisioning frameworks.

▪️ No changes to probation periods
The EBA considered shortening the probation period for certain forborne exposures (e.g. from 1 year to 3 months), but ultimately rejected the idea.

Reason: It would widen the gap between the prudential definition of default and the definition of non-performing exposures (NPEs).

▪️ Technical CRR3 alignment
The amendments also include technical updates following CRR3 implementation, including:
▸ removal of outdated references to the previous 180-days-past-due discretion;
▸ updates related to distressed restructuring terminology.