Response to consultation paper amending Guidelines on definition of default
1. Question 1: Do you believe the current guidelines result in some exposures under forbear-ance measures to be incorrectly classified as defaults, thus hindering proactive, preventive and meaningful restructurings given the detrimental effects that defaulted status has for the affected obligors? If so, please further specify the characteristics of the exposures, which you deem as being subject to an incorrect classification of default.
Yes. For small-business exposures under light forbearance measures (NPV loss 1–5 %, no other unlikeliness-to-pay indicators) the current framework often triggers a default classification that is disproportionate to the actual risk. In IMK’s dataset (520 SME cases, 2011–2019), ratio-only models show near-random predictive power (AUC ≈ 0.515). Adding behavioural and management variables increases predictive accuracy to AUC ≈ 0.706; 52 % of firms initially assessed as non-viable were still active three years later. This evidence suggests that short-term liquidity stress combined with proven payment discipline should not automatically lead to default. A proportionate approach—linking default status to measurable cash-flow recovery—would better balance prudence and viability.
(See Executive Summary §7; §3.2.1 ¶20–23; §3.2.2.)
2. Question 2: Do you think that relaxing the criteria for the minimum period before returning to the non-defaulted status for defaulted forborne exposures could be an appropriate measure to alleviate a higher burden on your institution and clients? How material would the difference be in your case between the amounts of forborne exposures classified as NPE and as defaulted if the minimum one-year probation period in the definition of default were reduced to three-months for certain forborne exposures (with change in NPV below 5% and no loss on the nominal amount)? Would that proposal create additional operational burden or practical impediments? Do you see support such proposal, and if so, for which reasons?
Yes. Reducing the probation period from one year to three months for schedule-only forbearance (NPV < 5 %, material payment ≤ 20 %) would materially ease unnecessary Stage-3 and RWA pressure for viable SMEs. Operationally, the approach is straightforward: 13-week cash-flow monitoring, monthly cure checks and light covenants (DSCR/ICR). IMK evidence shows faster cure rates, shorter “time-in-default” and stable repayment after three months of discipline. We therefore support the alternative considered in §3.2.2 and Amendments §4 ¶72/¶73, while recommending clarification with Article 47a CRR (NPE ≥ 12 months) to avoid a dual regime.
(Pin-cites: §3.2.2 Consultation box; Amendments §4 → ¶72/¶73; §5.1.2.)
3. Question 3: Do you see any alternatives other than those referred to in this section that the EBA should consider under Article 178(7) CRR to update the Guidelines and encourage insti-tutions to engage in proactive, preventive and meaningful debt restructuring to support ob-ligors?
The EBA could complement the current framework with:
- A safe-harbour for SME exposures with NPV ≤ 1 %, subject to standard covenants;
- Mandatory uniform NPV-calculation rules (original EIR, fees, timing, rounding) to ensure predictability;
- A supervisory Q&A clarifying the alignment between default and NPE definitions for SME restructurings; and
- Explicit recognition of data-driven proportionality, using 13-week cash-flow, DSCR/ICR and order-backlog indicators as measurable evidence of recovery.
These alternatives increase consistency and transparency without weakening prudential standards.
(See Executive Summary §7; §3.2.1; §3.2.2; Art. 47a CRR.)
4. Question 4: Do you use internal definitions of default and NPE that are different from each other? Which differences are these and how material are those differences? Do you have any reasons or observed practical impediment that warrants a different definition of NPE and default? If so, please provide examples where a different definition of NPE and default is appropriate.
Yes. In practice, institutions applying a shorter default-cure (three months) may face misalignment with the minimum 12-month NPE definition under Article 47a CRR. This creates operational friction—credit limits remain constrained even when repayment discipline is proven. A supervisory clarification or dedicated Q&A for SME restructurings with low NPV impact and purely scheduling changes would resolve this inconsistency while preserving data comparability.
(See §3.2.2; §5.1.2; Art. 47a CRR.)
5. Question 5: Would a potential lack of alignment between the default and NPE definition lead to issues in accounting in your case?
Yes. A lack of alignment between default and NPE definitions could lead to inconsistent accounting transitions between IFRS 9 Stages 2 and 3, producing unnecessary P&L volatility. Clear guidance on how and when exposures revert from defaulted to performing status under both frameworks would maintain transparency and comparability.
(See §3.2.2; §5.1.2; Art. 47a CRR.)
6. Question 6: Do you agree that no specific provisions should be introduced for moratoria on the grounds of the sufficient flexibility of the revised framework? In case you think the pro-posed alternative treatment for legislative moratoria should be included in these guidelines, do you have any evidence of the definition of default framework being too procyclical in the context of moratoria? Do you agree with the four conditions that need to be satisfied?
We agree that no additional provisions are needed for moratoria. The current framework already provides sufficient flexibility: the NPV test applies only to forborne exposures, and the assessment of financial-difficulty status allows for professional judgement. In practice, a short “liquidity vs solvency” scan (13-week cash-flow, external support or insurance proceeds) effectively prevents misclassification. Legislative moratoria can remain exceptions, subject to the criteria in §3.3.
(Pin-cite: §3.3 Considerations on moratoria.)
7. Question 7. Do you agree with the revised treatment of technical past due situations in rela-tion to non-recourse factoring arrangements? And if you do not agree, what are the rea-sons? Do you have any comments on the clarifications of paragraphs 31 and 32 in the current GL DoD?
Yes. We support the revised treatment of technical past-due situations in non-recourse factoring. Extending the threshold from 30 to 90 days per invoice reflects actual payment behaviour in many sectors (DSO ≈ 60–75 days) and prevents false default alerts caused by administrative or chain delays. The clarifications to paragraphs 31 and 32 correctly distinguish genuine credit risk from technical timing issues.
(Pin-cites: §3.4; Amendments §4 → ¶11–¶14.)
8. Question 8. Do you agree with the other changes to the guidelines to reflect updates from Regulation (EU) 2024/1623?
Yes. We agree with the remaining CRR3-related updates. The revised terminology (“forbearance” instead of “distressed restructuring”, 90-day DPD harmonisation) aligns the default definition with IFRS and supervisory practice. IMK’s templates and data models already apply these parameters.
(Pin-cites: §3.5; Amendments §4.)