18 Sep 2026 7 min read
On 7 May 2026, the European Banking Authority (EBA) published its final report amending the Guidelines on the application of the definition of default under Article 178 of the Capital Requirements Regulation (CRR), following the CRR3 amendments to Article 178(3)(d).
The revised Guidelines seek to reinforce timely and harmonized recognition of borrower deterioration across EU institutions, while maintaining consistency between default recognition, forbearance measures and the prudential treatment of non-performing exposures (NPEs).
While industry feedback called for greater flexibility, particularly in relation to restructuring, the EBA concluded that the existing framework already provides sufficient flexibility to accommodate temporary liquidity pressures without weakening prudential soundness and harmonized default recognition. The result is therefore not a fundamental redesign of the definition of default, but a set of targeted amendments, supervisory clarifications and technical updates.
A central feature of the revised framework is the retention of the 1% Net Present Value (NPV) threshold for restructuring-related defaults under Article 178(3)(d) CRR.
The EBA retained the threshold after considering proposals to increase it to 2% or 5%, or replace it with predominantly qualitative criteria. Its assessment was that the existing framework already provides sufficient flexibility and that a higher threshold could weaken harmonization and comparability across institutions, create inconsistencies with the existing 1% past-due materiality threshold and introduce further operational implications for IRB and IFRS 9 frameworks, including model recalibration and validation requirements.
The methodology for assessing diminished financial obligation also remains unchanged. Institutions continue to compare pre- and post-restructuring cash flows, discounted using the original effective interest rate. Importantly, improvements in creditworthiness; for example through additional collateral or guarantees – do not offset an NPV loss for default-classification purposes.
The one-year probation period for returning restructuring-related defaults to non-defaulted status has likewise been retained. The EBA considered proposals to shorten the period to three to six months but did not introduce the change, in part because this could create an inconsistency with the one-year minimum applicable to NPE reclassification under Article 47a CRR.
Following CRR3, the terminology has been aligned with the prudential framework: references to “distressed restructuring” have been replaced by references to forbearance measures resulting in a diminished financial obligation.
Institutions continue to perform two distinct assessments: first, whether a measure qualifies as a forbearance measure under Article 47b CRR; and second, whether it results in a diminished financial obligation under the NPV framework.
Importantly, an NPV loss below the 1% threshold does not eliminate the need to assess other unlikeliness-to-pay (UTP) indicators. These include a large lump-sum payment at the end of a repayment schedule, irregular schedules with low initial payments, significant grace periods and exposures subject to forbearance more than once. Where repayment schedules are modified because of borrower financial difficulties, institutions must assess both whether the modification constitutes a forbearance measure and whether an indication of UTP exists.
The most substantive operational change concerns factoring arrangements.
The technical past-due threshold at invoice level has increased from 30 to 90 days for receivables relating to goods and services. The change reflects the economic characteristics of purchased receivables, including lengthy invoice-validation cycles, disputes and tripartite payment flows. Cure rates of 93-100% further supported the EBA's conclusion that invoice-level delays do not necessarily indicate genuine debtor distress.
The revised exception is, however, specifically limited to goods and services receivables. Debt, credit and loan-related receivables, as well as leasing arrangements, are excluded.
The Guidelines also clarify the treatment of payments made directly to the client rather than the factor: the days-past-due counter continues only where the obligor was adequately informed of the cession but nevertheless paid the client.
Other amendments include the removal of references to the former 180-day past-due discretion, together with updated references to the prudential treatment of NPEs under Articles 47a and 47b CRR. Institutions are also required to verify regularly that forborne NPEs are classified as default where applicable.
The EBA also considered whether moratoria warranted a dedicated derogation. No permanent exemption was introduced. The rationale is that moratoria do not automatically constitute forbearance measures or trigger default classification; a judgement regarding financial difficulties remains necessary. The exceptional treatment applied during the COVID-19 pandemic was therefore not extended into a permanent prudential exemption.
The revised Guidelines reinforce an important prudential distinction: temporary liquidity pressures should not automatically be equated with broader borrower deterioration, but material economic losses arising from forbearance remain relevant indicators of credit deterioration. The EBA considers that higher NPV thresholds or broader exemptions could weaken harmonization, increase variability in risk-weighted assets (RWAs) and create opportunities for regulatory arbitrage through repeated minor concessions.
For institutions, the implications therefore extend beyond the amendments themselves. Areas that may warrant review include:
The revised Guidelines represent targeted evolution rather than wholesale change. The EBA has preserved the core architecture of default recognition –most notably the 1% NPV threshold and one-year probation period– while introducing a material operational adjustment for factoring and aligning terminology and references with the CRR3 framework.
For financial institutions, the key question is therefore not simply what has changed, but how the revised requirements interact with existing credit-risk, restructuring, forbearance, IRB, IFRS 9, NPE and operational frameworks.
As institutions prepare to implement the revised requirements, a structured assessment of these interdependencies can help identify potential gaps in governance, methodology, data and operational processes, while maintaining consistency with evolving prudential expectations.
Grant Thornton Financial Services supports financial institutions in assessing and operationalizing regulatory change across Definition of Default and credit-risk frameworks, restructuring and forbearance, model risk management and validation, monitoring and cure frameworks, IRB and IFRS 9 impact assessments, operational processes, data governance, regulatory assurance and policy enhancement.
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