Press release

A broader scope of the definition of default is necessary

26 January 2016

In response to the European Banking Authority’s (EBA) call for an increased level of harmonisation in the application of the definition of default across the EU prudential framework, the European Mortgage Federation – European Covered Bond Council (EMF-ECBC) has published a response paper outlining its key views on the EBA initiative:

 The EMF-ECBC welcomes the objective of the EBA Guidelines to harmonise the definition of default to ensure consistency of its application and transparency as well as the comparability of risk parameters across Member States.

 However, due to the importance of the concept of default, it is essential to guarantee its consistency also within the larger supervisory framework. Accordingly, the definition of default should be consistent across the EU’s capital requirements, the EBA technical standards and the implementation of the International Financial Reporting Standards on Financial Instruments (IFRS 9), and any future EBA guidelines.

 The EMF-ECBC expresses its concerns on implementing a too narrow harmonised definition of default across different credit institutions and jurisdictions in the EU. For example, the EMF-ECBC considers the definition of technical default proposed by the EBA to be too narrow in scope. In addition, the EMF-ECBC proposes that the sale of credit obligations is considered as an indication for unlikeliness to pay but should be associated with other indicators and not used as a stand-alone criterion.

 The EMF-ECBC believes that the new definition should not be applied retroactively. The Guidelines should allow for sufficient time needed for the implementation of them by the Industry.

Commenting on the EBA proposed Guidelines, Luca Bertalot, EMF-ECBC Secretary General, said:

”Improving the consistency of the way EU credit institutions apply the definition of default is a welcome step forward. However, for it to be successful the EBA must consider widening the scope of the harmonised definition and provide sufficient time for credit institutions to adjust their internal rating systems accordingly.”

The EMF-ECBC encourages the EBA to engage with the Industry to determine feasible proposals and rules safeguarding a level playing field in the introduction of the new harmonised definition of default.

The full response paper is available via the EMF-ECBC website here.