(ii) Definition of Default
CA-5.8.63
A default is considered to have occurred with regard to a particular obligor when either or both of the two following events have taken place:
(a) The bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realising security (if held); and(b) The obligor is past due more than 90 days on any material credit obligation to the banking group. Overdrafts will be considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than current outstandings.Amended: April 2011
Apr 08CA-5.8.64
The elements to be taken as indications of unlikeliness to pay include:
(a) The bank puts the credit obligation on non-accrued status;(b) The bank makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to the bank taking on the exposure;51(c) The bank sells the credit obligation at a material credit-related economic loss;(d) The bank 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;52(e) The bank has filed for the obligor's bankruptcy or a similar order in respect of the obligor's credit obligation to the banking group; and(f) The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of the credit obligation to the banking group.
51Specific provisions on equity exposures set aside for price risk do not signal default.
52Including, in the case of equity holdings assessed under a PD/LGD approach, such distressed restructuring of the equity itself.
Amended: April 2011
Apr 08CA-5.8.65
CBB will periodically provide appropriate guidance as to how these elements must be implemented and monitored.
Apr 08CA-5.8.66
For retail exposures, the definition of default can be applied at the level of a particular facility, rather than at the level of the obligor. As such, default by a borrower on one obligation does not require a bank to treat all other obligations to the banking group as defaulted.
Apr 08CA-5.8.67
A bank must record actual defaults on IRB exposure classes using this reference definition. A bank must also use the reference definition for its estimation of PDs, and (where relevant) LGDs and EADs. In arriving at these estimations, a bank may use external data available to it that is not itself consistent with that definition, subject to the requirements set out in paragraph CA-5.8.75. However, in such cases, banks must demonstrate to CBB that appropriate adjustments to the data have been made to achieve broad equivalence with the reference definition. This same condition would apply to any internal data used up to implementation of this Module. Internal data (including that pooled by banks) used in such estimates beyond the date of implementation of this Module must be consistent with the reference definition.
Apr 08CA-5.8.68
If the bank considers that a previously defaulted exposure's status is such that no trigger of the reference definition any longer applies, the bank must rate the borrower and estimate LGD as they would for a non-defaulted facility. Should the reference definition subsequently be triggered, a second default would be deemed to have occurred.
Apr 08
