July 2020

New criteria for default identification 2020

The introduction of a new definition of default (“NDoD”) by the European Banking Autority, coming into force in 2021, originates from the need to armonize the different practices across the European Union, in order to enable the comparison of the risk parameters and regulatory capital of credit institutions located in different Member States.

This will inevitably change many management processes, e.g. regarding default identification and non-performing exposure management. Accounting aspects will also be subject to change, not only in terms of classification and coverage, but also in terms of the so-called “staging criteria” required by the IFRS 9 accounting standard. Substantial changes to internal models will occur, triggering new validation requests to supervisors. For some institutions, the new definition could also result in temporary capital shortages.

The present special report aims to provide solutions and benchmarks to deal with the consequences of the introduction of the new definition of default.

This document draws upon a position paper produced by AIFIRM, the Association of Italian Financial Institutions' Risk Managers through a technical committee that was coordinated by CRIF. Our gratitude goes to AIFIRM for consenting to this publication.