The European Banking Authority (EBA) published today its final Report amending the Guidelines on the application of the definition of default. The Report introduces targeted amendments to better reflect specific aspects of non-recourse factoring. It also confirms that the 1% threshold applied to reductions in net present value loss (NPV threshold) in debt restructuring remains appropriate for prudential default recognition.

The EBA has introduced targeted amendments to address specific technical aspects of the past-due treatment of non-recourse factoring. In particular, the specific technical past-due treatment at the individual invoice level has been extended from 30 to 90 days. This change better reflects the operational features of invoice-based receivables and reduces the risk of incorrect default classifications. The Guidelines have also been updated to align with the amendments introduced by the Capital Requirements Regulation (CRR 3).

At the same time, the current NPV threshold framework is sufficiently flexible, risk-sensitive and consistent with the accounting framework. It does not lead to default misclassifications, as it applies only to borrowers experiencing financial difficulties, and to restructurings resulting in losses. In addition, it is aligned with other thresholds used for default identification, ensuring a simple and efficient framework.

By contrast, amending the framework - such as by increasing the NPV threshold - could undermine post-financial-crisis efforts to reduce non-performing loans by weakening the reliability of capital and provisioning assessments. Such changes would also entail significant operational costs, including redevelopment and revalidation of models. Ultimately, they could reduce the resilience of the banking sector and discourage credit institutions from undertaking proactive, preventive, and meaningful debt restructuring to support borrowers.

Legal references and background

Article 178 of Regulation (EU) No 575/2013 provides criteria for the regulatory definition of a default. Among these criteria, in paragraph 3, point (d) mentions 'forbearance measure […] likely to result in a diminished financial obligation due to the material forgiveness, or postponement, of principal, interest or, where relevant, fees'. In September 2016, the EBA published guidelines to further clarify the definition of default, as part of its IRB repair program.

Article 178(7) of the CRR, as amended by Regulation (EU) 2024/1623, mandates the EBA to review and update the Guidelines on the definition of default, and in particular to consider the need to grant sufficient flexibility to institutions when specifying what constitutes a 'diminished financial obligation'. In this review, the EBA dully considered the necessity to encourage proactive, preventive and meaningful debt restructuring to support obligors.

This review work forms part of the EBA roadmap on the implementation of the Basel III framework through the EU banking package.