Changes to the reporting of default and risk data in relation to written-off instruments in line with the requirements of the EBA Guidelines on the application of the definition of default
Changes are made to the reporting instructions regarding the data attributes “default status of the counterparty”, “date of default status of the counterparty”, “default status of the instrument” and “date of default status of the instrument” and “probability of default” in relation to written-off instruments. Following the requirements set out in the EBA guidelines on the application of the definition of default, which apply from 1 January 2021, reporting agents should have in their system the information about default and the loss incurred for all instruments. Consequently, the existing AnaCredit instructions are amended to ensure that this information is also reported under AnaCredit. These amended instructions apply to reference dates from 31 January 2021, i.e. after which they should incorporate the requirements of these EBA guidelines in their internal procedures and IT systems.
Section 184.108.40.206 of Part II of the AnaCredit Manual describes which (monthly and quarterly) data are required to be reported until the end of the quarter in which the write-off occurs. In particular, the only data attributes that are explicitly referred to in that section in this regard are the “outstanding nominal amount”, the “accumulated write-offs” and the “cumulative recoveries since default”. This means that at present no information on whether or not the write-off was owing to a default event maybe available for a subset of AnaCredit instruments (for example, in the case of a sale of credit-impaired obligations). Meanwhile, the information about the default status of instruments and/or debtors is key to many areas of credit risk analytics, including the In-house Credit Assessment Systems (ICAS). Given that a default event resulting in a write-off (either because the instrument is sold at a material loss or because of debt forgiveness) is the most severe case of default, this lack of default information on the debtor in question is disadvantageous.
Please note that the requirement regarding what information institutions should record in their databases is laid down in the EBA Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013.
In particular, Article 46 of the Guidelines stipulates that, regardless of the moment of the sale (the sale of credit obligations may be performed either before or after the default), if the sale was related to a material credit-related economic loss, the information about the loss should be adequately recorded and stored for the purpose of the estimation of risk parameters. Furthermore, Article 47 stipulates that “if the sale of a credit obligation at a material credit-related economic loss occurred before the identification of default on that exposure, the moment of sale should be considered the moment of default”.
Against this background, the instructions provided in Section 220.127.116.11 in Part II of the Reporting Manual are complemented so that the counterparty default/risk datasets are still required for written-off instruments until the end of the month in which the write-off takes place in order to ensure that no default signal is missed.
It should be noted that the requirement of receiving the default information is deemed to have been sufficiently met if the default and risk datasets are reported once the write-off has taken place.
More specifically, in relation to written-off instruments, reporting agents report until at least the end of the month in which a write-off occurs on the data attributes “default status of the counterparty”, “date of default status of the counterparty”, “default status of the instrument” and “date of default status of the instrument” and “probability of default” along with the data attributes “outstanding nominal amount”, “accumulated write-offs” and “cumulative recoveries since default”.
However, the requirement to report the risk information for written-off instruments applies in cases where, in accordance with Point 9.6 of Annex I of the AnaCredit Regulation, the relevant NCB decided to collect the counterparty risk data on a quarterly basis, i.e. such banks only report the risk dataset at the end of the quarter in which a write-off occurs.
Note that, in line with the provisions of Article 47 of the EBA Guidelines, the data attributes, while reported for a (month-end) reporting reference date, actually refer to the moment of default rather than the reporting reference date.
Note also that, in cases where the default is recorded at instrument level, the data attributes “default status of the counterparty” and “date of default status of the counterparty” do not need to be reported, and vice versa.
Notably, the instructions provided in relation to Case 13.2 in Part III of the AnaCredit Reporting Manual also need to be read in connection with the amended instructions.
Finally, in relation to the date of application of the amended instructions, this is aligned with the timelines set out in the EBA Guidelines. These guidelines apply from 1 January 2021, but competent authorities may accelerate the timeline of this transition at their discretion. Therefore, AnaCredit reporting agents are expected to incorporate the amended instructions in their internal procedures and IT systems by no later than 31 January 2021. The changes to the instructions do not require any revisions of past data to be sent to AnaCredit.