In credit risk, default seems like a simple concept.
In practice, it depends partly on the framework being used.
In EACRA Educational Series #17, we clarify a key distinction that is often misunderstood:
– Credit Rating Agencies rely primarily on forward-looking credit judgement, with UTP (Unlikely To Pay) – the assessment that an obligor is unlikely to meet its obligations in full and on time – at the core of default analysis.
– Prudential regulation builds on this judgement-based approach by adding a standardised rule-based trigger, such as the 90-days-past-due (DPD) criterion, to ensure supervisory consistency.
These approaches serve different objectives and are built on different logics.
They are complementary – but not interchangeable.
Understanding this distinction is essential for:
– sound credit risk analysis
– informed use of ratings
– constructive dialogue between markets, supervisors, and regulators
