This concept paper aims to examine the operational, capital and governance challenges that European banks face when applying Article 178 of the Capital Requirements Regulation (CRR) to recognise default, with particular emphasis on Standardised Approach banks. While existing literature has largely focused on Internal Ratings-Based (IRB) institutions, the distinctive implications for banks using the Standardised Approach remain underexplored.
The analysis adopts a doctrinal and policy review methodology, drawing on primary regulatory texts, European Banking Authority guidelines, supervisory expectations and comparative practices from other jurisdictions. A stylised case illustration demonstrates how qualitative default recognition criteria affect capital adequacy and borrower relationships.
This paper highlights interpretive ambiguity, operational inconsistency and commercial conflicts inherent in invoking the “unlikely to pay” criterion. For Standardised Approach banks, default recognition can have disproportionately severe impacts on risk-weighted assets, IFRS 9 provisioning and competitive positioning. The comparative review indicates that while similar principles exist globally, supervisory approaches to proportionality and implementation vary.
This study is conceptual and does not present empirical data or quantitative testing. The case examples are hypothetical and may require adaptation to specific institutional contexts or national regulatory frameworks.
This paper offers recommendations to strengthen governance, enhance transparency and improve proportionality in default recognition processes. It underscores the importance of codified criteria, independent oversight and clear borrower communication.
Proportionate and transparent default recognition practices can protect borrowers, enhance trust in the banking system and promote financial stability. However, inconsistent application or excessive rigidity can harm credit access and borrower confidence.
By systematically analysing Article 178 through the lens of Standardised Approach banks, this paper addresses a gap in regulatory scholarship and provides actionable insights for practitioners and policymakers.
