EBA definition of Default intended to harmonize the default flag across the EU. All the financial institutions under the scope of CRR will have to implement the new definition of default.

1. Main Changes
New Definition of Default (DoD)
Steps to be followed by banks
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Gap analysis
Perform detailed gap analysis covering all aspects of the DoD
framework. Areas covered should include data, processes, systems,
models and policies.
Modelling
Assess the impact of the new DoD on risk parameters, including the
dependencies with other models. Perform re-calibrations of PDs, LGDs
and EADs to the new default definition and more generally to the new
requirements of the IRB regulatory roadmap.
Remediation
Design a remediation plan with clear timelines and responsibilities
aimed at addressing the identified gaps.
Documentation
Review internal policies to reflect the new requirements and ensure
compliance with regulations.
Implementation
Produce IT specifications to translate the new requirements in the
internal bank’s IT systems and retrospectively apply the new default
definition to the historical data. Maintain a register of the changes to
the default definition.
Impact assessment
Conduct assessment to understand the impact on re-calibrated
parameters and in terms of Risk Weighted Assets (RWA).
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Impacted models
New
Definition
of
Default
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5
4
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2
1
IRB
PD, EAD, LGD,
ELBE
Scorecards
and
Rating
Models
ICAAP, Risk
Appetite and
Credit Portfolio
Management
IFRS 9
models
Business &
Strategic
Planning
Stress
Testing
EBA GL on the application of the definition of default
 Past due criterion. The GL clarify aspects with regard to the counting of days past due, the technical past due situation, etc.
 Indications of UTP. Guidance is provided regarding the application of each indication (bankruptcy, distressed restructuring, etc.).
 Application of the definition of default in external data. Certain requirements are specified for institutions that use the IRB
Approach and use external data for the purpose of estimating risk parameters.
 Criteria for the return to a non-defaulted status. The probation period and the minimum conditions for reclassification to a non-
defaulted status are specified (including specific rules applying to exposures subject to distressed restructuring).
 Consistency. It is specified that institutions should identify the default of a single obligor consistently, and also that institutions may
use different definitions of default for certain types of exposures, although differences have to be justified.
 Definition of default for retail exposures. The GL clarify aspects with regard to the level of application (e.g. credit facility level).
 Documentation and internal governance. The GL include some documentation requirements, and also governance requirements
for IRB banks
December
2020
RTS on the materiality threshold and NBR regulation no.5
 Materiality threshold. CAs are required to set a threshold for retail and for ‘non-retail’, which will apply to all institutions in a
given jurisdiction. The RTS require that this threshold is composed of both an absolute and a relative threshold.
 With regard to the materiality threshold, NBR requires:
• for retail exposures the financial institutions shall use 1% as a relative threshold and 150 lei as an absolute threshold
• for non-retail exposures the financial institutions shall use 1% as a relative threshold and 1000 lei as an absolute
threshold
Overview on the new definition of default
Implications
• Moreover, the DoD should be used at least
in the area of monitoring of exposures
and in the internal reporting to senior
management and the management body.
• Finally, the internal audit unit should
review regularly the robustness and
effectiveness of the process used for the
identification of default.
Internal policies
• Institutions should recalibrate their risk parameters (PD, LGD
and EAD), or at least assess the impact, which may result in the
need to adapt the systems as it is necessary to redefine the
historical data of default.
• As the changes in the definition of default
may result in reclassifications of non-
defaulted exposures as defaulted,
institutions should monitor the impact on
capital requirements for credit risk.
Impact on capital and on internal
models• Institutions should review their internal
policies and procedures in order to include
certain aspects that should be defined. In
particular, institutions should specify other
additional indications of UTP, what types of
arrangements are treated as bankruptcy,
the treatment of joint exposures (e.g.
contagious effect), etc.
• Implement the specifications regarding the
past due criterion and the indications of
UTP.
• Adjust the probation period to 3 months
(1 year in the case of distressed
restructuring).
• Adapt the materiality threshold to the
level set by CAs.
• Ensure consistency in the identification of
a single obligor
• Institutions should adapt their methodologies and systems.
Thus, among others, institutions should:
Classification of exposures as defaultGovernance (for IRB institutions)
• The DoD and the scope of its application are required to be
approved by the management body (or by a committee) and
by senior management.
• Moreover, they should comply with the documentation
requirements.
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Scope of application Next steps
EBA definition of Default intended to harmonize the default
flag across the EU. All the financial institutions under the
scope of CRR will have to implement the new definition of
default.
The implementation of GL
and of the RTS is expected at
the latest by end-2020.

2. Deloitte’s offering to your Bank can include:
• Review of the methodology, functional specification, assumptions and
design
• Assist on required analyses and actions to implement the new definition
of default
• Develop/Re-develop scorecards, internal credit risk and IFRS 9 models,
including macro models
• Provide a holistic solution for development, validation and
benchmarking
• Validate internal models
Key
Success
Factors Data and IT
Centralized data definition, data quality
checks, samplings of portfolios, quantify
impact of known challenges. Support in the
preparation of data and process flows.
Organization
Centralized response team and
communication, kick-off meetings and an
action plan. Clear responsibilities and action
plan.
Governance and Processes
Review of key governance structures and
processes to be compliant with regulatory
requirements and ECB views on minimum
requirements
HOW
CAN
WE
HELP
Deficiencies and Issue Management
Become aware of potential deficiencies by
running preliminary health checks, use
opportunity to understand past issues,
anticipate issues and work on remedies and
quantify impact
Most significant changes of the IT systems
Experienced professionals
Senior professionals with broad-based and relevant
experiences in IFRS 9 modelling, audit and risk advisory
Experience and multi-dimensional exposure
to the supervisory approach
• The direct participation in scorecard models, IRB and IFRS 9 models
development in order to be compliant with NCAs and regulatory
requirements
• The supervisory approach and the critical supervisory view on
deficiencies is part of the inherent experience of our professionals
• Deloitte has supported the supervisor in several missions with
different topics and provided advice to banks in the internal models
development or Comprehensive Assessment (AQR) before NCAs
review…
…this unique combination of different views enables Deloitte to provide
substantial support in relation to validation of IRB or IFRS9 models and
level of the Impairment.
International Team
Global resource and knowledge network: topic clarifications and
refinements, training, benchmarking, exchange of technical questions and
leading practices, support in all relevant jurisdictions
BUCF and ECRS
Collaboration on an international level through the Banking Union Center in
Frankfurt (BUCF) and the EMEA Center for Regulatory Strategy (ECRS) providing
fundamental views on regulatory changes and issues
Dimitrios Goranitis
Partner, FSI Risk &
Regulatory Advisory Leader
digoranitis@deloittece.com
+40 751 250 684
ContactsQualification
Elena Grigore
Director, FSI Risk &
Regulatory Advisory
egrigore@deloittece.com
+40 733 003 888
New Definition of Default (DoD)
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Parallel to systems
upgrades, another work-
block needs to focus on the
application of the new
DoD on the stock of
historical data in order to
simulate the impact on the
non-performing portfolio,
as well as on parameters
like PD, LGD, etc.
There will be a critical
need to move from a
monthly to a daily
storage of data
tracking exposures,
DPD, delayed payments,
as well as UTP indicators.
Readjusting the stock of
default exposures is also
important for recalibrating
risk components. The
latter will vary after the
integration of the full set
of new criteria for entry
and exit from defaulted
status.1
The changes in the
systems require time for
planning, development
and testing.
Institutions should assess
the quantitative impact of
the new DoD application.
The systems should ensure a timely identification and automated channeling of the information on default
triggers in order to treat the relevant exposure and operate the default classification of the exposure /
obligor in time. The same applies for the return to non-default status.
Regarding counting the days past due and the allocation of UTP reasons, the institutions
should have a daily identification and a follow-up process of default triggers. The
flagging of the exposures that have be marked as defaulted should not happen on the
monthly basis. Contagion should be performed on a daily basis and the origin behind
default triggers should be available within IT systems.
With the new DoD, systems should integrate an additional condition to trigger the
counting of DPD, i.e. the exceeding of both absolute and relative thresholds. This
implies the ability of the system to:
 properly value the past due amount of an obligation;
 properly value the total on-balance exposure of an obligor especially in the
cases of joint obligors.
For institutions that decide to apply the definition of default for Retail exposures at the obligor level, the
system should be parameterized to properly apply contagion between the exposures of a single obligor
but also specific contagion rules for joint credit obligations.
Where default is applied at obligor level, the identification of obligors and in particular
“joint obligors” identification has to be consistent: the system should allow identifying a
“joint obligor” as a specific set of individual obligors that have a joint obligation. The
system should treat it as a different obligor, distinct from the individual obligors. This
point is crucial for the correct application of materiality thresholds on joint credit
obligations as well as for default contagion.
Automation
Daily
recognition
of default
Materiality
threshold
Obligor
identification
Contagion
Risk
effectiveness
and efficiency
© 2019. For information, contact Deloitte Romania