Effectively Preparing for the EBA's New Definition of Default by 2020 - Dr Petr Zemcik, Senior Director, Economics & Business Analytics Maria ...

Effectively Preparing for the EBA’s New
Definition of Default by 2020
Dr Petr Zemcik, Senior Director, Economics & Business Analytics
Maria Valle Del Olmo, Associate Director-Senior Economist, Economics & Business Analytics July 2019

Agenda
1. The Big Picture
2. EBA documents on the Definition of Default (DoD)
3. Regulatory Technical Standards (RTS) on the materiality threshold
 for credit obligations past due
4. Guidelines (GL) on the application of the DoD under Article 178
5. Is my institution ready? Checklist

 New Definition of Default 2

Presenters
Content Solutions – Economics & Business Analytics
Petr Zemcik is a Senior Director at the Moody’s Analytics London office who manages of a team of risk modelers in London
and Prague offices. He frequently serves as an engagement lead and a head modeler for projects across several lines of
business in Europe, Africa, and the Middle East to design and validate PD/LGD/EAD credit risk models for IFRS 9, A-IRB,
and stress testing. He previously worked at CERGE-EI, a joint workplace of the Center for Economic Research and Graduate
Education of Charles University in Prague and the Economics Institute of the Academy of Sciences of the Czech Republic,
and at Southern Illinois University in Carbondale. He has published numerous articles on econometric methodology and on
real estate bubbles in peer-reviewed professional journals such as Journal of Real Estate Economics and Finance, Journal of
Housing Economics, and Journal of Multivariate Analysis. Petr holds a Ph.D. and MA in Economics from the University of
Pittsburgh and MSc in Econometrics and Operations Research from the University of Economics in Prague.

Maria Valle Del Olmo is an Associate Director at the Moody’s Analytics London office. Her responsibilities include leading
client projects regarding capital and impairment forecasting and stress testing, particularly for retail and SME portfolios.
During her career at Moody’s, Maria has been involved in onsite client projects including an end-to-end IRB submission for a
main UK challenger commercial bank and the development of an IFRS9 project for a middle sized overseas retail bank.
Maria had previously worked for two major global banks and a well-known data analytics company. During her experience
Maria has covered a wide spectrum of credit risk models including IRB, business as usual, stress testing, provisioning and
economic capital models. She holds an MSc in Mathematics by the University Complutense of Madrid.

 New Definition of Default 3

1 The Big Picture

Key Regulatory Documentation
Overview
Since its creation in 2011, the European Banking Authority Some of the products already finalised by the EBA are:
(EBA) has been actively engaged in the creation of
 IRB assessment methodology
» Regulatory Technical Standards (RTS)
 RTS on IRB assessment methodology (EBA/RTS/2016/03)
» Guidelines (GL)

aimed at providing a single set of harmonised prudential rules Definition of default (Dod)
for financial institutions throughout the EU.
 RTS on the materiality threshold of credit obligations past due (EBA/RTS/2016/06)

The set of harmonised rules (the “Single Rulebook”) is GL on the application of the Definition of Default under Article 78 (EBA/RTS/2016/07)
expected to ensure comparability of capital requirements
across the EU and to help create a level playing field. Risk parameters estimation and treatment of
 defaulted assets
In this context, the EBA has also extensively worked on the
development of an IRB roadmap, with the aim of reducing GL on the estimation of PD, LGD. and treatment of defaulted exposures (EBA/GL/2017/16)

RWA variability across institutions using IRB models. RTS on the specification of the nature, severity and duration of an economic downturn
 (EBA/ RTS/2018/04)
As part of this effort, the EBA has completed a number of GL for the estimation of LGD appropriate for an economic downturn (EBA/GL/2019/03)
regulatory products, covering topics identified as potential
drivers of variability across institutions.
 The target deadline for the implementation IRB roadmap is
 31 December 2020

 New Definition of Default 5

Impacted areas
The changes are expected to have significant impact for banks, across different areas
Governance Modelling
Banks will need to perform a gap Modelling teams need assess the impact of the
analysis and update their internal change in default in their IRB models and if
policies to reflect the new material, recalibrate the rating systems to the
requirements. new definition. As IRB models are often feeder
 models to other models, the changes may impact
IT also on IFRS 9 and Stress Testing models.

Significant IT effort is expected in
terms of implementation of the new Validation
definition, particularly to ensure Changes in the rating systems as a result of the
timely identification of default , implementation of the new definition are required
including unlikeliness to pay to be validated by the Internal Validation
requirements and back-casting function. Adequate Margin of Conservativism is
historical data to recreate the new required when the new DoD cannot be fully
default definition. recreated in the historical period considered in the
 reference datasets.
Processes
The internal processes should be Audit
reviewed and updated, to gather the
 Audit should review regularly the robustness and
necessary information in a timely
 effectiveness of the process used by the
manner.
 institution for the identification of default

 New Definition of Default 6

Affected Models
Standard Model Landscape

 Decisioning
 Scorecards and
 Rating Models
 IRB
 PD, LGD, EAD ICAAP, Risk
 Appetite & Business &
 IFRS9 & Stress Credit Portfolio Strategic
 Testing Management Planning
 Provisioning/IFRS9, Correlations,
 Forecasting, Scenario Concentration, CVaR,
 Analysis/Stress Testing RAROC, & Operational
 Risk

 NOVA SBE Scorecards 7

Small Difference for the UK Mortgages
UK RMBS Data – European Data Warehouse

 0.50 160,000
 Loan count
 0.45 Zero materiality threshold 140,000
12-Month Default Rate

 0.40 [100 GBP, 2.5%] Materiality threshold
 120,000
 0.35

 Loan Count
 0.30 100,000
 0.25 80,000
 0.20 60,000
 0.15
 40,000
 0.10
 0.05 20,000
 0.00 0
 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16

 NOVA SBE Scorecards 8

2 EBA documents on the
 Definition of Default (DoD)

Linking the new DoD to CRD IV and CRR
EBA documents on the Definition of Default (DoD) (1/3)
The implementation of the Basel III rules in the EU is done via
1. The Capital Requirements Directive (CRD IV)
2. The Capital Requirements Regulation (CRR)

The CRD IV / CRR legislative package came into force in the EU in January 2014.

The CRR (regulation (EU) 575 / 2013) details the prudential requirements for credit institutions. The EBA has the mandate to
develop a number of Regulatory Technical Standards (RTS) and Guidelines (GL) in connection with some CRR articles.

The following table summarises some of the documents finalised so far:

Area Regulatory products EBA code CRR article mandate
 Articles 144 (2), 173 (3),
IRB assessment methodology RTS on IRB Assessment Methodology (EBA/RTS/2016/03)
 180(3b)
 RTS on the materiality threshold of credit obligations past due (EBA/RTS/2016/06) Article 178 (6)
Definition of Default
 GL on the application of the Definition of Default under Article 78 (EBA/RTS/2016/07) Article 178 (7)
 RTS on the specification of the nature, severity and duration of an economic downturn (EBA/ RTS/2018/04) Article 502
 (EBA/ RTS/2018/04)
Risk parameter estimation and Article 502
 GL on the estimation of PD, LGD and treatment of defaulted exposures (EBA/GL/2017/16)
treatment of defaulted assets
 GL for the estimation of LGD appropriate for an economic downturn (EBA/GL/2019/03) Article 502

 New Definition of Default 10

Two regulatory products relating to the DoD
EBA documents on the Definition of Default (DoD) (2/3)

 Regulatory Technical Standards (RTS)
 On the materiality threshold for credit obligations past due
 RTS
 (EBA / RTS / 2016 / 06)
 Definition of Default
 Applicable for firms using either the IRB or the Standardised approach
 Article 178 for regulatory capital calculation.

 Regulation (EU) No 575 / 2013
 (CRR)
 Guidelines (GL)
 On the application of the Definition of Default (DoD) under Article 178
 GL
 (EBA / GL / 2016 / 07)
 Applicable for firms using either the IRB or the Standardised approach
 for regulatory capital calculation.

In addition, the EBA published an opinion on the use of 180 days past due (EBA / Op/ 2017/ 17) which applies only to banks using IRB
approach for regulatory capital calculation.

 New Definition of Default 11

An overview of the RTS and the GL
EBA documents on the Definition of Default (DoD) (3/3)
 RTS on the materiality threshold for credit obligations past due
 (EBA/RTS/2016/06)
 The RTS specify the conditions according to which a competent authority shall set the threshold for
 credit obligations past-due.

 GL » Cover one aspect of the definition of default, which regards the threshold against which the materiality
 of a credit obligation past due is assessed. The RTS is referenced in the Guidelines.
 (EBA / GL / 2016 / 07)
 » It is expected to have a significant implications for banks and represents a step forward towards the
 comparability of default risk and capital requirements across the EU.
 » It is been endorsed European Commission a transformed into EU regulation (Commission delegated
 Regulation (EU) 2018 / 171). Therefore it is legally binding and directly applicable in all Member States.
 » Deadline for the application is no later than 31 December 2020.
 RTS GL on the application of the DoD under Article 178 (EBA/GL/2016/07)
 (EBA / RTS / 2016 / 06) The GL specify the requirements on the application of Article 178 of the CRR on the definition of default.
 » Cover all the aspects regarding the definition of default, that is, the entirety of Article 178.
 » Addressed to competent authorities and to financial institutions.
 • Competent authorities should comply with the guidelines by incorporating them in their supervisory
 processes and legal framework. The RTS is referenced in the Guidelines.
 • By extension, the financial institutions within each jurisdiction should comply with the guidelines as
 adopted by their supervisor.
 » Deadline for the application is no later than 01 January 2021.

 New Definition of Default 12

3
 RTS on the materiality
 threshold for credit obligations
 past due

Summary of EBA / RTS/ 2016 / 06
RTS on the materiality threshold for past due obligations (1/4)
Key elements
 The following table summarises the thresholds values specified in
The materiality threshold consists of an absolute and a relative the regulation:
component:

 • absolute component - maximum amount for the sum of
 all amounts past due owed by an obligor to the
 institution, the parent undertaking or any of its subsidiaries
 • relative component – percentage reflecting the amount
 of the credit obligation past due in relation to the total
 amount of all on-balance sheet exposures to the
 institution, the parent undertaking and any of its
 subsidiaries. » The RTS gives some flexibility to competent authorities to
» The obligor should be considered defaulted when both the adopt a relative threshold different than 1%, but always in the
 absolute and the relative threshold are exceeded during 90 range between 0% and 2.5%, if considered more reasonable
 consecutive days. within their jurisdiction (needs to be justified to the EBA).
» For retail exposures the definition can be applied at facility level.
» Different absolute components of the threshold between retail The RTS on the materiality threshold for credit obligations past
 and non-retail. due (EBA/RTS/2016/06) was endorsed transformed into EU
 regulation on February 2018 ( Regulation (EU) 2018/171) . It is
 legally binding and directly applicable to all Member States.
 Deadline for the application is 31/12/2020

 New Definition of Default 14

Examples of Application
RTS on the materiality threshold for past due obligations (2/4)
 European Central Bank (ECB)

 » In order to comply with the RTS, the ECB published Regulation (EU) 2018/1845 on the materiality threshold for credit
 obligations past due, applicable to at all significant institutions within the Single Supervisory Mechanism (SSM).
 » In line with the EBA recommendations, the following thresholds apply:
 • Retail - 1% relative threshold, € 100 absolute threshold.
 • Non-Retail – 1% relative threshold € 500 absolute materiality threshold.
 Prudential Regulatory Authority (PRA)

 » Following the release of the Policy Statement 7/19, the PRA has amended Article 11.4 of the Supervisory Statement 11/17 in
 order to comply with the EBA requirements. Financial Institutions in the PRA jurisdiction have to comply with the requirements by
 December 2020.
 » In line with the EBA recommendations, the following thresholds apply:
 • Retail - 0% relative threshold, £0 absolute threshold.
 • Non-Retail – 1% relative threshold, a sterling equivalent of €500 absolute materiality threshold.

 Other EU competent authorities

 Competent authorities may determine the absolute threshold in local currency equivalent of €100 / €500 or re-set it to better align
 with the domestic price levels.

 New Definition of Default 15

Thresholds Significantly Differ Within the ECB Jurisdiction
RTS on the materiality threshold for past due obligations (3/4)
Situation before the implementation Target situation

 All banks in the
 SSM
 by December
 2020

 *Banks under the ECB jurisdictions should have notified the
 ECB (before June 2019) the exact date they intend to comply
 with the deadline.

Source: ECB Costs and benefits analysis

 New Definition of Default 16

A Bit of History… and Deadlines on the Horizon
RTS on the materiality threshold for past due obligations (4/4)

 Final RTS published by EBA reflecting
 First draft published – start Published in the Official
 the public consultation feedback.
 of the consultation Journal of the EU.
 Passed to the European Commission.

 Jan 2015 Oct 2017 Dec 2020

Oct 2014 Jun 2016 Feb 2018

 Consultation
 (EBAended, 22 / 06)
 / RTS / 2016
 responses collected and EC publishes the draft EU Application deadline
 published on the EBA’s regulation (31/12/2020)
 website.

 New Definition of Default 17

4 GL on the application of the
 DoD under Article 178

Overview of EBA / RTS / 2016 / 07
Overview GL on the application of the DoD under Article 178
Overview
» The deadline for the application is 1 January 2021
» Applicable for firms using either the IRB or the Standardised approach for regulatory capital calculation.
» Institutions using the IRB approach should assess and, where necessary, adjust their rating systems (PD, LGD & EAD) so as to reflect
 the new definition of default, applying the following principles:
 • Adjust the historical data based on the new definition of default, particularly as a result to the introduction of the new
 materiality threshold.
 • Assess the impact on all risk parameters and on RWAs after the relevant adjustments on historical data.
 • Include additional margin of conservativism (MoC) in order to compensate for possible distortions in risk estimates resulting from
 inconsistent definition of default in the historical data used for modelling purposes.
» All changes to IRB models due to the implementation of the new default definition are required to be verified Internal validation function

Topics
» The guidelines provides detail requirements for the following aspects of the DoD:
 Documentation,
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures
 management & processes

 New Definition of Default 19

Past Due Criterion in the Identification of Default
Topics covered in the GL on the application of the DoD under Article 178 (Topic 1/ 7)
 Documentation, management
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures & processes

 Past due criterion – summary of requirements Challenges and / or areas of attention
 This section of the GL specifies the requirements for :

 » The counting of days past due, including: The introduction of the new material thresholds is
 expected to have as significant impact in risk
 ✓ details for specific cases such as: 01 parameters and capital requirements. Models will
 • changes in the payment schedule need be to recalibrated to the new default definition.
 • disputes between the obligor and the institution
 • changes of obligor due to merger & acquisitions
 ✓ requirements regarding the calculation (i.e. sum of all All detected errors that lead to a
 amounts past due that are related to any credit obligation of the technical past due situations should
 obligor) and the frequency of update, which should ensure a be rectified by the institutions in the
 timely identification of default. 02 shortest timeframe possible. For IRB
 institutions, technical past dues should
 » Technical past dues , which should not to be classified as not be flagged as defaults in the
 defaults. reference dataset.

 » The materiality threshold, in line with the requirements of the RTS
 (EBA/RTS/2016/06) previously discussed.
 » Specific guidance/requirements for Exposures to central The calculation of sum past due should allow for a
 03
 governments, local authorities and public sector entities as well timely identification of default and up-to-date
 as a set of provisions applicable for factoring and purchased and consistent whatever the scope is (decision
 receivables. making, internal risk management, reporting, etc.)

 New Definition of Default 20

Indications of Unlikeliness to Pay
Topics covered in the GL on the application of the DoD under Article 178 (Topic 2 / 7)
 Documentation, management
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures & processes

Unlikeliness to pay – summary of requirements
 Challenges and / or areas of attention
This section of the GL provides details regarding the requirements
necessary for an obligor to qualify as unlikely to pay.
» Non-accrued status Implementation the detailed requirements
» Specific Credit Adjustment (SCRA) regarding the definition of distressed
» Sale of a credit obligation at a material credit-related loss 01 restructuring formula, may imply
 significant IT effort, particularly om the
 • Non credit-related sales are not to be considered default. timely identification of default.
 • The credit related loss (L) is considered material L > 5%, where
 ✓ L = (E – P) / E
 ✓ E is outstanding amount of the obligations subject to sale.
 ✓ P = Price agreed for the sold obligations
 Institutions should consider information
P is the price agreed for the sold obligations available in external databases
» Distressed restructuring (credit registers, public information
 • Concessions towards debtors facing financial difficulties, likely to 02 sources, and financial analyst’s
 reports,…) indicating financial
 result in a diminished financial obligation. difficulties of the debtor as indicator of
 • The diminished financial obligation (D0) is considered material if unlikeliness to pay.
 D0>1%, where
 ✓ D0 = (NPV0-NPV1) / NPV0
 ✓ NPV0 is the net present value of cash flows (including unpaid interest and fees)
 expected under contractual obligations before the changes in the terms and
 conditions of the contract, discounted using the customer’s original effective Institutions should have clear policies and
 interest rate.
 ✓ NPV1 is the net present value of the cash flows expected based on the new
 03 procedures of application of the criteria for
 arrangement, discounted using the customer’s original effective interest rate. unlikeliness to pay.
» Bankruptcy.
» Other indications of unlikeliness to pay - including the use of external
information.
 New Definition of Default 21

Application of the Definition of Default to External Data
Topics covered in the GL on the application of the DoD under Article 178 (Topic 3 / 7)
 Documentation, management
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures & processes

External data – summary of requirements Challenges and / or areas of attention
IRB banks using external data for the purpose of estimating their internal
models, should take into account the following requirements:
 Institutions should be able to
» Verify whether the definition of default used in the external data is in demonstrate competent authorities the
line with Article 178 of the CRR. 01 broad equivalence with the internal
 DoD.
» Verify whether the definition of default used in external data is
consistent with the definition of default as implemented by the institution
in terms of:
 • the counting of days past due
 • the type and level of materiality threshold
 • the definition of distressed restructuring
 • the type and level of specific credit risk adjustments and criteria
 to return to non-default status

» Document performed analysis and identified differences.
» For each difference (1) assess whether the alignment to the internal
definition of default would lead to an increased or decreased default rate When differences exist but are not possible to
or if it is possible to determine (2) perform appropriate adjustments in 02 overcome with adjustments in the external
the external data or be able to demonstrate that the difference is data, institutions are required to adopt an
 appropriate Margin of Conservativism (MoC).
negligible in terms of impact in risk parameters and own funds.

 New Definition of Default 22

Criteria for the Return to a Non-Defaulted Status
Topics covered in the GL on the application of the DoD under Article 178 (Topic 4 / 7)
 Documentation, management
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures & processes

Return to non-default – summary of requirements Challenges and / or areas of attention
This section of the GL provide the requirements for the cure definition.
 Banks should define clear criteria and
 internal policies reflecting the
» In terms of probation period the guidelines specify it should be
 01 definition of cure.

 a. At least 3 months for all types of defaults (except distressed
 restructured)
 b. At least 1 year for defaults due to distressed restructuring
 Banks should monitor the
 effectiveness of the policy in terms
 02
» The probation period can be different for different types of of:
exposures. • Impact in cure rates
 • Impact on multiple defaults
 • changes of status

 An excessive number of multiple
 03 defaults would be an indication that the
 bank should update the policy.

 New Definition of Default 23

Consistency and Retail Exposures
Topics covered in the GL on the application of the DoD under Article 178 (Topic 5-6 / 7)
 Documentation, management
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures & processes

Consistency in the application of the DoD Challenges and / or areas of attention
This section of the GL specifies the requirements for the consistent
application of the definition of default:
 Where the exchange of client data among different
» Across single obligors legal entities within an institution is not possible due
 01 to consumer protection regulations, bank secrecy
» Across types of exposures or other legislation institutions should inform their
 competent authorities of this impediment and
Retail Exposures - Level of application estimate the materiality.
» For retail exposures, the DoD can be applied at facility level.
» Banks should choose the level of application (facility vs. obligor) in a
 If the unique identification of defaults across
way that reflects their internal risk management practices. the different legal entities, geographies, etc.
 02 is excessively burdensome for the institution
» Banks can apply the DoD at the facility level for some types of retail
 – e.g. requiring the development of overly
exposures and at the obligor level for some other type of exposures complex mechanisms - banks can deviate
(e.g. Other Retail vs. Retail SME asset classes). from this requirements if they can
 demonstrate that there are very few obligors
» Even when the DoD is applied at facility level, if there are indications
 in common and their exposure is not material
of unlikeliness to pay that affect the overall situation of the obligor rather (e.g. retail).
that of the individual exposures, all the exposures to the obligor should
be considered defaulted regardless of the level of application of the Ensure that the internal and external
DoD. 03 figures reflect a situation where all
 exposures are correctly classified.

 New Definition of Default 24

Documentation, Policies and Risk Management Process
Topics covered in the GL on the application of the DoD under Article 178 (Topic 7 / 7)
 Documentation, policies &
 Past due criterion Unlikeliness to pay External data Return to non-default Consistency Retail Exposures processes

Documentation, policies and process – summary of Challenges and / or areas of attention
requirements
Timeliness identification of default
 Where the exchange of client data among different
» Automatic processes such as counting days past due should be legal entities within an institution is not possible due
performed on a daily basis. 01 to consumer protection regulations, bank secrecy
 or other legislation institutions should inform their
» Manual processes should be updated with a frequency that competent authorities of this impediment and
guarantees the timely identification of default. estimate the materiality.

» Control mechanisms should ensure that the relevant information is
used in the default identification process.
 The daily calculation requirement for
Documentation automatic processes may imply
 02 significant IT efforts for some
» Document policies regarding the DoD including all triggers for the financial institutions.
identification of default and the cure criteria.
» Produce specifications for the definition of default.
» Keep an updated register of the definition of default.
Governance Institutions to update their IT
» Adopt adequate mechanisms and procedures in order to ensure that 03 specifications and to keep a register of
 the DoD. Internal Audit reviews
the DoD is implemented and used in a correct way. regularly the robustness and
 effectiveness of the process.

 New Definition of Default 25

A Bit of History… and Deadlines on the Horizon
Timeline for GL on the application of the DoD under Article 178

 Consultation Paper on the EBA/GL/2016/07 draft published. Competent authorities
 GL first published communicate to the EBA their
 (EBA/CP/2015/15). Questionnaire is sent out to banks to intention to comply with the GL.
 inquire information about the expected
 impact.

 Jan 2016 Sep 2016 Jan 2021

Sep 2015 Jul 2016 Mar 2017
 EBA publishes the Quantitative Impact Application deadline
 Four months consultation Study (QIS) related to the (01/01/2021)
 period ends. questionnaire.

 New Definition of Default 26

New Definition Will Reduce Unwarranted RWA Variability
Quantitative impact assessment hints at a modest increase in the capital charge
EBA’s QIS contains a qualitative and a quantitative part to better assess the DoD impact:
 Treatment of SCRA
 Responses to the EBA questionnaire re-affirmed that some of Contagion effect
 Materiality threshold
 Qualitative the RWA variability stems from key differences in terms of Probation period
 DPD rule, materiality thresholds across banks. Sale of credit obligations
 Technical default recognition

 Using banks’ self-reported data in conjunction with COREP ∆ 
Quantitative ∆ 
 EBA found that the impact on SA banks might be negligible, ∆ , ∆ 
 while a change in the capital charge is on the cards for IRB
 ∆ ∆ ∆ 
 Banks where the new DoD has an impact on the estimated
 risk parameters.
 CET-1 New default definition will likely reduce the average Common
 1 + ∆ 1 1
 Impact Equity Tier 1 ratio of around 20 basis points for IRB Banks ∆ 1 = −
 + ∆ 
 leading to a modest increase in capital charge.

 New Definition of Default 27

5 Checklist

Is My Institution Ready?
Checklist

1 Gap analysis
 Perform detailed gap analysis covering all aspects of
 4 Documentation
 Review internal policies to reflect the new requirements
 the DoD framework. Areas covered should include data, and ensure compliance with regulations.
 processes, systems, models & policies.

 Modelling

2 Remediation
 Design a remediation plan with clear timelines and
 5 Assess the impact of the new DoD on risk parameters,
 including the dependencies with other models.
 responsibilities aimed at addressing the identified Perform re-calibrations of PDs, LGDs and EADs to the
 gaps. new default definition and more generally to the new
 requirements of the IRB regulatory roadmap.

3 Implementation
 Produce IT specifications to translate the new 6 Impact assessment
 Conduct assessment to understand the impact on re-
 requirements in the internal bank’s IT systems and calibrated parameters and in terms of Risk Weighted
 retrospectively apply the new default definition to the Assets (RWA).
 historical data. Maintain a register of the changes to
 the default definition.

 New Definition of Default 29

Q&A

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 New Definition of Default 30

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt

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