UK Prudential Regulator Publishes Final Rules on Definition of Default for Credit Risk

The U.K. Prudential Regulation Authority has published final rules and an updated Supervisory Statement alongside a Policy Statement on the definition of default for credit risk. The EU Capital Requirements Regulation's risk quantification provisions set out that a default occurs when an obligor is past due more than 90 days on any material credit obligation to a firm, its parent or any of its subsidiaries. The materiality of the credit commitment is to be assessed against a threshold set by the national regulator according to its view of a reasonable level of risk.

The European Banking Authority developed a roadmap in 2016 to address concerns about the variability of own funds requirements arising from the internal models that firms use to calculate their minimum credit risk capital requirements under the CRR. The PRA is adopting a two-stage approach to implementing the EBA's roadmap. This first stage concerns the definition of default. The PRA will consult later on implementation of the second stage on PD and LGD estimation, once the EBA's regulatory products on this topic have been finalized.

The EBA's regulatory products on the definition of default are: the Regulatory Technical Standards on the materiality threshold for credit obligations past due, the Guidelines on the application of the definition of default and the EBA Opinion on the use of the 180 days past due criterion. The PRA's implementation of these products involve: (i) an amendment to the Credit Risk Part of the PRA Rulebook to set thresholds for determining whether a credit obligation is material; and (ii) an update to the PRA's expectations set out in its Supervisory Statement "Internal Ratings Based (IRB) approaches" (SS) 11/13).

The changes are relevant to U.K. banks, building societies and PRA-designated U.K. investment firms. The changes will take effect from December 31, 2020, in line with the EBA's deadlines for implementation of its roadmap, unless a firm obtains approval for an extension.

View the Policy Paper (PS7/19).

View the updated Supervisory Statement: Internal Ratings Based (IRB) approaches (SS11/13).

View the final rules.

View details of the PRA's consultation paper.

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