EBA updates guidelines on the definition of default, including non-recourse factoring

The European Banking Authority (EBA) has published its final report amending the Guidelines on the application of the definition of default. The amendments include targeted changes to better reflect aspects of non-recourse factoring and confirm that the 1% threshold for reductions in net present value loss (NPV threshold) remains appropriate for prudential default recognition.

The EBA extended the technical past-due treatment at the invoice level from 30 to 90 days to better align with operational features of invoice-based receivables and reduce incorrect default classifications. The guidelines have also been updated to align with amendments introduced by Capital Requirements Regulation (CRR 3).

The current NPV threshold framework is considered flexible, risk-sensitive, and consistent with accounting standards. It applies only to financially distressed borrowers and restructurings resulting in losses, preventing misclassification of defaults. The framework’s alignment with other default thresholds ensures simplicity and efficiency.

Amending the NPV threshold, such as increasing it, could undermine efforts to reduce non-performing loans, weaken capital and provisioning assessments, and incur operational costs for model redevelopment. Such changes could also reduce banking sector resilience and discourage proactive debt restructuring to support borrowers.

Legal references include Article 178 of Regulation (EU) No 575/2013 and Article 178(7) of the CRR, as amended by Regulation (EU) 2024/1623, which mandate the review and update of default guidelines to ensure flexibility for institutions and support proactive debt management.

For more information, visit the official EBA publication.