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Default Definition (Art. 178)

Foundational definition of when an obligor or facility is considered to be "in default" for IRB, SA defaulted exposure, EL-vs-provisions comparison, and COREP/Pillar III non-performing reporting. Applies identically across CRR and Basel 3.1 in structure, with a small number of PRA PS1/26 refinements that are called out below.

Regulatory Reference:

  • CRR (current UK onshored): Regulation (EU) 575/2013 Art. 178, as retained and amended by Regulation (EU) 2019/876 (CRR2)
  • Basel 3.1 (effective 1 Jan 2027): PRA Rulebook (Credit Risk: Internal Ratings Based Approach (CRR)) Art. 178, as implemented by PRA PS1/26 Appendix 1 pp. 128–131
  • Upstream standard: BCBS CRE36.67–82 (IRB default definition)

Pipeline Position: Input — default status is supplied by upstream obligor/facility monitoring systems via the is_defaulted flag and is not derived inside the calculator.

Requirements Status

ID Requirement Priority Status
FR-DEF-1 is_defaulted input flag consumed on every exposure (loan, contingent, facility) P0 Done
FR-DEF-2 Defaulted exposures routed to SA defaulted (Art. 127) / IRB defaulted (Art. 153(1)(ii), Art. 154(1)(i)) branches P0 Done
FR-DEF-3 Defaulted exposures excluded from SME supporting factor (CRR Art. 501) P0 Done
FR-DEF-4 is_defaulted partitions EL vs provisions pools (Art. 159, two-branch rule) P0 Done
FR-DEF-5 Defaulted exposures reported in COREP C 09.01 defaulted rows / Pillar III CR1/CR5/CR6 defaulted columns P1 Done
NFR-DEF-1 Default classification not derived in-engine — upstream responsibility P0 Done

Overview

A default shall be considered to have occurred with regard to a particular obligor when either or both of the following have taken place:

  1. Unlikeliness to pay (UTP) — the institution considers that the obligor is unlikely to pay its credit obligations in full without recourse by the institution to actions such as realising security (Art. 178(1)(a)).
  2. 90 days past due (DPD) — the obligor is more than 90 days past due on any material credit obligation to the institution, its parent undertaking, or any of its subsidiaries (Art. 178(1)(b)).

Either limb is sufficient. The two limbs are independent triggers — a defaulted obligor may be 0 DPD but satisfy a UTP indicator (e.g. bankruptcy filing, distressed restructuring), or may fail no UTP indicator but simply be past due.

For retail exposures, the definition may be applied at the individual credit facility level rather than at the level of the total obligations of the obligor (Art. 178(1) second sub-paragraph). Non-retail exposures default at the obligor level ("one-obligor-one-rating" principle — Art. 172(1)(e)).

Upstream Assessment Responsibility

The calculator treats is_defaulted as an upstream input. Institutions are expected to operate a default-monitoring system that applies the Art. 178 criteria (DPD counting, materiality, UTP indicators, cure/probation) on a per-obligor or per-facility basis and flags the exposure accordingly. The RWA engine consumes the flag and routes the exposure to the defaulted-treatment branches. No DPD counter, UTP inference, or cure-period timer runs inside the engine.

Limb (a): Unlikeliness-to-Pay Indicators (Art. 178(3))

The institution shall treat an obligor as "unlikely to pay" where any of the following indicators are present:

# Indicator Reference
(a) The institution puts the credit obligation on non-accrued status (interest income suspension) Art. 178(3)(a)
(b) The institution recognises a specific credit risk adjustment resulting from a significant perceived decline in credit quality subsequent to the institution taking on the exposure Art. 178(3)(b)
(c) The institution sells the credit obligation at a material credit-related economic loss Art. 178(3)(c)
(d) The institution consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or, where relevant, fees Art. 178(3)(d)
(e) The institution has filed for the obligor's bankruptcy or a similar order in respect of an obligor's credit obligation to the institution, its parent, or any of its subsidiaries Art. 178(3)(e)
(f) The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of a credit obligation Art. 178(3)(f)

The list is non-exhaustive — institutions may specify additional UTP indicators in their internal policies (Art. 178(5A)(b)(iv) references "any additional indications of unlikeliness to pay specified by the institution").

Specific Credit Risk Adjustment Trigger

Indicator (b) creates a direct link between IFRS 9 Stage 3 recognition and default. Once an exposure enters Stage 3 (lifetime ECL, credit-impaired), the associated specific credit risk adjustment (SCRA) is a UTP indicator — the exposure is defaulted under Art. 178(1)(a) even if the 90-DPD threshold has not been crossed. Conversely, Stage 2 exposures (collective ECL) do not automatically trigger default unless an individual watch-list SCRA is booked. See GCRA qualifying criteria for the IFRS 9 → CRA mapping.

Equity PD/LGD Distressed Restructuring (CRR Art. 178(3)(d), extension)

Under CRR Art. 178(3)(d), the distressed-restructuring indicator explicitly extends to equity: "in the case of equity exposures assessed under a PD/LGD Approach, distressed restructuring of the equity itself". PS1/26 retains the same substantive treatment through the Art. 155 IRB Simple / Art. 165 PD/LGD route.

Limb (b): 90 Days Past Due — Counting Rules (Art. 178(2))

General Rule

The obligor is in default when more than 90 days past due on a material credit obligation.

Overdrafts (Art. 178(2)(a)–(b))

For overdrafts, days past due commence once an obligor:

  • has breached an advised limit, or
  • has been advised a limit smaller than current outstandings, or
  • has drawn credit without authorisation and the underlying amount is material.

An "advised limit" comprises any credit limit determined by the institution and about which the obligor has been informed (Art. 178(2)(b)).

Credit Cards (Art. 178(2)(c))

Days past due for credit cards commence on the minimum payment due date.

Documented Policies (Art. 178(2)(e))

Institutions shall have documented policies in respect of the counting of days past due, in particular in respect of:

  • re-ageing of the facilities
  • granting of extensions, amendments, or deferrals
  • renewals
  • netting of existing accounts

Policies shall be applied consistently over time and aligned with internal risk management and decision processes.

Materiality Threshold

A credit obligation past due is only a default trigger if the past-due amount is material — i.e. both a minimum absolute amount AND a minimum proportion of the total credit obligation are exceeded.

Basel 3.1 (PS1/26 Art. 178(2)(d)/(da)) — Hardcoded Thresholds

Exposure Type Absolute Threshold Relative Threshold Reference
Retail Sum of past due amounts > GBP 0 Past-due / on-balance-sheet exposure (excl. equity) > 0% Art. 178(2)(d)(i)/(ii)
Non-retail Sum of past due amounts > GBP 440 Past-due / on-balance-sheet exposure (excl. equity) > 1% Art. 178(2)(da)(i)/(ii)

The retail thresholds effectively mean any past-due amount counts — PS1/26 sets retail materiality at the minimum possible level, aligned with the previous PRA Rulebook "Materiality Threshold" rule that was deleted when PS1/26 embedded the thresholds directly into Art. 178.

CRR — Competent-Authority-Set Threshold

Under the current UK CRR (Art. 178(2)(d)), materiality "shall be assessed against a threshold, defined by the competent authorities". This threshold shall reflect a level of risk that the competent authority considers to be reasonable.

The PRA has historically set these via the "Materiality Threshold" rule in the PRA Rulebook (now deleted in PS1/26 App. 1 p. 440 because the values have been moved into Art. 178 itself), which set retail materiality at > GBP 0 / > 0% and non-retail at

GBP 500 / > 1%.

Materiality Threshold — Regime Change

Under CRR, materiality is delegated to the competent authority and sits in a separate Rulebook rule. Under PS1/26, materiality is hard-coded into Art. 178 itself (paras (2)(d) and (2)(da)) at GBP 0 / 0% (retail) and GBP 440 / 1% (non-retail). The retail materiality collapses to "any past-due amount at all"; non-retail adopts a small floor to filter micro-arrears.

Suspension of the DPD Counter — PS1/26 only (Art. 178(1A)–(1D))

PS1/26 introduces four explicit suspension paragraphs not present in the current CRR. These are discretionary ("an institution may …") and must be documented policies.

Paragraph 1A — Disputed Obligations

Where the repayment of the obligation is the subject of a dispute between the obligor and the institution, the counting of days past due may be suspended until the dispute is resolved, provided at least one of:

  • (a) the dispute has been introduced to a court or another formal procedure performed by a dedicated external body that results in a binding ruling in accordance with the applicable legal framework in the relevant jurisdiction; or
  • (b) in the specific case of leasing, a formal complaint has been directed to the institution about the object of the contract and the merit of the complaint has been confirmed by independent internal audit, internal validation, or another comparable independent auditing unit.

Paragraph 1B/1C — Government, Local Authority, PSE 180-Day Extension

For exposures to central governments, local authorities, or public sector entities, the institution may apply the 1C treatment (no materiality inclusion; no default classification) where all the following conditions are met (Art. 178(1B)):

  • (a) the contract is related to the supply of goods or services, where the administrative procedures require certain controls related to the execution of the contract before the payment can be made (e.g. factoring exposures; does not apply to bonds);
  • (b) apart from the delay in payment, no other UTP indicators apply, the financial situation of the obligor is sound, and there are no reasonable concerns that the obligation might not be paid in full (including any overdue interest); and
  • (c) the obligation is no more than 180 days past due.

When the 1B conditions are met, the institution may:

  • (1C(a)) not include the past-due amounts when calculating the materiality thresholds in 2(d)/(da); and
  • (1C(b)) not consider the exposures to be in default for the purposes of Art. 178.

This is the PS1/26 replacement for the CRR Art. 178(1)(b) "competent authorities may replace 90 days with 180 days" option for PSE/RRE/SME CRE retail (see framework comparison below).

Paragraph 1D — Dilution Risk Dispute

Where there is a dispute between the obligor and the seller and such event is related to dilution risk (purchased receivables), the institution may suspend the counting of days past due until the dispute is resolved.

External Data Adjustment (Art. 178(4))

An institution that uses external data that is not itself consistent with the definition of default laid down in paragraph 1 shall make appropriate adjustments to achieve broad equivalence with the Art. 178 definition. This applies where the institution relies on pooled PD data, rating-agency transition matrices, or purchased receivable performance data that uses a different default definition (e.g. 180-day Fitch default).

Return to Non-Defaulted Status (Art. 178(5))

A defaulted exposure shall continue to be rated as being in default until at least 3 months have passed since the conditions in Art. 178(1)(a) and (b) ceased to be met. During this period:

  • the institution shall have regard to the behaviour and financial situation of the obligor (Art. 178(5)(b));
  • at the expiry of the 3-month period, the institution shall perform an assessment and, if it finds that the obligor is unlikely to pay its obligations in full without recourse to realising security, the exposures shall continue to be classified as being in default until the institution is satisfied that the improvement in credit quality is factual and permanent (Art. 178(5)(c));
  • the institution may apply a longer period than 3 months for a given type of exposure (Art. 178(5)(d));
  • the probation regime applies to new exposures to the obligor, in particular where previous defaulted exposures have been sold or written off (Art. 178(5)(e)).

Distressed Restructuring — 1-Year Probation (Art. 178(5A)–(5C))

Where default was triggered by distressed restructuring (Art. 178(3)(d)), the obligor or facility shall be rated as non-defaulted in paragraph 5 only if:

Timing (Art. 178(5A)(a)) — at least one year has passed since the latest of:

  • (i) the moment of extending the restructuring measures,
  • (ii) the moment when the exposure was classified as defaulted, or
  • (iii) the end of the grace period included in restructuring arrangements.

Conditions (Art. 178(5A)(b)) — all of the following must be met:

  • (i) during the one-year period, a material payment has been made by the obligor. A material payment may be considered to be made where the debtor has paid via its regular payments under the restructuring arrangements a total equal to the amount that was previously past due (or that was written off under the restructuring measures, where no past due amounts existed);
  • (ii) during the one-year period, payments have been made regularly according to the schedule applicable after the restructuring arrangements;
  • (iii) there are no past due credit obligations according to the schedule applicable after the restructuring arrangements;
  • (iv) no UTP indicators (paragraph 3 or additional institution-specified indicators) apply;
  • (v) the institution does not consider it otherwise unlikely that the obligor will pay its credit obligations in full according to the schedule (particular attention to large lump-sum payments or significantly larger payments envisaged at the end of the schedule); and
  • (vi) conditions (i)–(v) are also met with regard to new exposures to the obligor, in particular where previously defaulted exposures subject to distressed restructuring were sold or written off.

Until both (a) and (b) are met, the exposure continues to be rated as being in default (Art. 178(5B)).

Obligor Change During Probation (Art. 178(5C))

  • Point (b)(i) (material payment) shall not apply where the obligor changes due to an event such as a merger or acquisition of the obligor, or any other similar transaction — the payment history of the legacy obligor is not transferable.
  • Point (b)(i) shall apply where there is only a change in the obligor's name (and no merger/acquisition) — name changes do not reset the clock.

Framework Comparison: CRR vs PS1/26

Aspect CRR (current) PS1/26 (effective 2027) Reference
Limb (a) UTP trigger Same list Same list (verbatim Art. 178(3)(a)–(f)) Art. 178(1)(a), (3)
Limb (b) 90 DPD threshold 90 days 90 days Art. 178(1)(b)
180-day option for RRE / SME CRE retail / PSE Competent-authority discretion to replace 90 with 180 days (not for Art. 36(1)(m) or Art. 127) Removed — replaced by Art. 178(1B)/(1C) goods-and-services PSE carve-out CRR Art. 178(1)(b) 2nd subpara ↔ PS1/26 Art. 178(1B)/(1C)
Dispute suspension Not explicit Art. 178(1A) — court/leasing complaint PS1/26 Art. 178(1A)
PSE goods-and-services 180-day carve-out Not explicit Art. 178(1B)/(1C) — strict conditions PS1/26 Art. 178(1B)/(1C)
Dilution risk dispute suspension Not explicit Art. 178(1D) PS1/26 Art. 178(1D)
Retail materiality (absolute / relative) Set by competent authority (PRA Rulebook: GBP 0 / 0%) GBP 0 / 0% hardcoded in Art. 178(2)(d) PS1/26 Art. 178(2)(d)
Non-retail materiality (absolute / relative) Set by competent authority (PRA Rulebook: GBP 500 / 1%) GBP 440 / 1% hardcoded in Art. 178(2)(da) PS1/26 Art. 178(2)(da)
UTP indicators Art. 178(3)(a)–(f); equity-specific distressed restructuring cited inline Same list in Art. 178(3)(a)–(f); equity integration via Art. 155/165 routing Art. 178(3)
3-month cure Art. 178(5) Art. 178(5) — expanded with explicit (a)–(e) sub-paragraphs Art. 178(5)
Distressed-restructuring 1-year probation Not explicit Art. 178(5A)–(5C) — detailed conditions, obligor-change carve-out PS1/26 Art. 178(5A)–(5C)
External data adjustment obligation Art. 178(4) Art. 178(4) (unchanged) Art. 178(4)
Retail facility-level application Permitted (Art. 178(1) 2nd subpara) Permitted (Art. 178(1) 2nd subpara) Art. 178(1)

PS1/26 Removes the CRR 180-Day Option

The CRR Art. 178(1)(b) second sentence allowed competent authorities to substitute 180 days for 90 days for exposures secured by residential property or SME commercial property in the retail class, and for PSE exposures — with the carve-out that the 180 days did not apply for Art. 36(1)(m) (non-performing deduction) or Art. 127 (SA defaulted). PS1/26 removes this option entirely and replaces it with the narrower, conditional Art. 178(1B)/(1C) PSE goods-and-services carve-out. UK retail RRE and SME CRE exposures therefore face the 90-day threshold unconditionally from 1 January 2027.

Downstream Consumers

The is_defaulted flag — once set upstream — propagates through the pipeline and drives the following downstream treatments:

Consumer Effect Reference
SA calculator (engine/sa/calculator.py; Art. 127 defaulted branch in engine/sa/risk_weights.py::_apply_defaulted_risk_weight, composed via apply_risk_weights) Exposure routed to Art. 127 defaulted branch (provision-coverage 100%/150% split; RESI RE non-income flat 100% under B31) CRR/B31 Art. 127
IRB F-IRB (engine/irb/calculator.py; defaulted K in engine/irb/adjustments.py::apply_defaulted_treatment) K = 0; RW driven by max(0, 12.5 × (LGD − BEEL)) Art. 153(1)(ii)
IRB A-IRB (engine/irb/calculator.py; defaulted K in engine/irb/adjustments.py::apply_defaulted_treatment) K = max(0, LGD − BEEL) using own LGD estimate Art. 154(1)(i)
Supporting factors (engine/supporting_factors.py:295,300) Defaulted exposures excluded from SME supporting factor (0.7619) CRR Art. 501
EL vs provisions (engine/aggregator/_el_summary.py:90–96) is_defaulted partitions Pool A (non-defaulted) and Pool C/D (defaulted) for Art. 159(3) two-branch rule CRR/B31 Art. 159
COREP reporting (reporting/corep/generator.py) Defaulted rows in C 07.00 / C 08.01 / C 08.02 / C 09.01 PS1/26 Annex II
Pillar III reporting (reporting/pillar3/generator.py) CR1 credit-quality rows; CR5 defaulted 300% bucket; CR6 defaulted PD band; CMS1/CMS2 defaulted columns PS1/26 Annex XXII/XXIV

Implementation

Input Schema

Default status is supplied via the is_defaulted boolean column on every exposure-level input record. It is not required and defaults to False.

# src/rwa_calc/data/schemas.py:744
"is_defaulted": ColumnSpec(pl.Boolean, default=False, required=False),

This flag is part of:

  • loans schema
  • contingents schema
  • facility_details (applies to the facility-undrawn row)

Upstream Assessment Contract

The calculator's contract with the upstream system is:

  • Input: a single is_defaulted boolean per exposure, reflecting the obligor-level (non-retail) or facility-level (retail) determination under Art. 178(1)(a)/(b).
  • No in-engine derivation: the engine does not check DPD counters, SCRA levels, bankruptcy status, restructuring history, or cure-period timers. All of these are the responsibility of the upstream default-monitoring system.
  • Consistency requirement (non-retail): where multiple exposures share the same obligor, the flag should be consistent across all of them unless the retail facility-level election under Art. 178(1) second sub-paragraph is in effect.

BEEL Companion Input (A-IRB only)

A-IRB defaulted exposures additionally require a beel (best estimate of expected loss) column per Art. 158(5) — the firm's own estimate of loss from the default event to final liquidation/recovery. See A-IRB defaulted specification.

beel > 0 is not a default trigger

The classifier derives is_defaulted from cp_default_status OR the row-level is_defaulted flag — beel > 0 alone does not route a row to defaulted treatment. A non-zero beel on any row whose derived is_defaulted is False is reported as a single non-blocking aggregate DQ008 warning carrying the total count; the value is otherwise unused. Restrict beel to defaulted rows in the upstream loader to suppress the warning. Detail in Defaulted Exposures spec — Required Input.

Post-Default Probation (Out of Scope)

The 3-month cure (Art. 178(5)) and 1-year distressed-restructuring probation (Art. 178(5A)–(5C)) must be enforced upstream before the is_defaulted flag can be flipped from True back to False. The calculator does not maintain per-obligor state between calculation runs.

Key Scenarios

Scenario ID Description Expected Routing
DEF-1 Non-retail obligor 91 DPD, material credit obligation > GBP 440 and > 1% of on-balance-sheet is_defaulted = True upstream → SA Art. 127 or IRB defaulted branch
DEF-2 Retail obligor 91 DPD, any past-due amount > GBP 0 is_defaulted = True → retail defaulted route
DEF-3 Non-retail obligor 91 DPD, past-due amount GBP 100 (below GBP 440 floor) Not a default (materiality floor not breached)
DEF-4 Obligor files for bankruptcy (UTP indicator (f)), 0 DPD is_defaulted = True — UTP limb (a)
DEF-5 Obligor granted distressed restructuring with principal write-off (UTP indicator (d)), 0 DPD is_defaulted = True — UTP limb (a), enters Art. 178(5A) 1-year probation on exit
DEF-6 PSE exposure 120 DPD on goods-and-services contract, no UTP indicators, sound financial state Not in default under PS1/26 Art. 178(1B)/(1C) — past-due amount excluded from materiality
DEF-7 Retail RRE exposure 100 DPD under CRR with competent-authority 180-day option Not in default under CRR; is in default under PS1/26 (180-day option removed)
DEF-8 Defaulted exposure cured for 3 months, UTP re-assessment finds improvement factual and permanent Upstream flips flag to False; engine routes as non-defaulted
DEF-9 Distressed-restructured exposure cured for 11 months (< 1 year) Upstream keeps is_defaulted = True — Art. 178(5A)(a) timing condition not met
DEF-10 Disputed obligation subject to court proceedings, 150 DPD Upstream may suspend DPD counter under Art. 178(1A); is_defaulted remains False
DEF-11 Obligor undergoing merger — payment history of legacy entity not transferable Art. 178(5C)(a): material-payment condition does not apply; new clock starts
DEF-12 External pooled PD data uses 180-day default definition Upstream adjusts per Art. 178(4) before feeding into calculator