EBA advises the Commission to disallow the application of the 180 day past due exemption for material exposures

The European Banking Authority (EBA) issued today its advice to the European Commission on the appropriateness of continuing to apply the 180 day past due (DPD) exemption for material exposures. Based on an analysis of data submitted by the institutions still using the 180 DPD criterion, the EBA recommends that this exemption be disallowed and all institutions should consequently rely on the 90 DPD regime for all exposures.

Based on a stock take, the EBA found that only a limited number of institutions in the EU currently make use of the 180 DPD criterion. The EBA analysed the impact of removing the 180 DPD criterion for these institutions on risk weighted exposure amounts and capital ratios. The results indicate an average relative change in risk exposure amounts of around +1.61 percent and an average expected decrease in the capital ratio of 0.37 percentage points, although with variation across the analysed institutions. 

In light of the widespread use of the 90 DPD criterion in the EU, the limited use of the 180 DPD criterion, the variability in risk weights caused by the 180 DPD criterion and the forthcoming changes in the accounting framework, the EBA recommends to the European Commission to disallow the application of the 180 DPD criterion. However, in order to allow the institutions currently using the 180 DPD to adjust to the 90 DPD regime, the EBA recommends that an appropriate transitional period should be provided.

Legal basis and background

The Capital Requirements Regulation (CRR) defines a default on the basis of two criteria, i.e.  when the obligor is past due more than 90 days, and/or when the obligor is considered to be unlikely to pay. In addition, for institutions applying the internal ratings based approach (IRB), the CRR allows competent authorities to replace the 90 days with 180 days for exposures secured by residential or SME commercial real estate in the retail exposure class, as well as for exposures to public sector entities.

Article 506 of the CRR mandates the EBA to deliver a report by 31 December 2017 on the impact of replacing the 180 DPD criterion, as currently allowed under point (b) in Article 178(1) CRR, with 90 DPD together with an assessment of the appropriateness of continued application of the 180 DPD criterion.

The EBA issued this Opinion according to Article 34(1) of its Founding Regulation, which mandates the Authority to provide opinions to the EU Parliament, the Council and the Commission on all issues related to its area of competence.