New Definition of Default: Unpacking the EBA Narrative
The European Banking Authority (EBA) recently released a consultation paper regarding article 178 of the CRR3 Capital Requirements Regulation. The consultation builds not only on the regulation but also on the existing guidelines for the definition of default.
This stacked approach makes the most recent insights of the EBA difficult to interpret as a solo read. Which is a pity since the definition of default is at the core of credit risk measurement. It is the starting point of not only probability of default (PD) but also loss given default (LGD), and hence also Risk-Weighted Assets, Pillar 2 Economic Capital and IFRS 9 provisioning.
Whereas for novels it is often a good idea to kick off the story “in medias res,” i.e. in the middle of things, for technical papers on risk management, it is a less effective way of communicating.
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