4.1 Firms that use the IRB approach and use external data for the purpose of estimation of risk parameters in accordance with Article 178(4) of the Credit Risk: Internal Ratings Based Approach (CRR) Part should do all of the following:

(a) verify whether the definition of default used in the external data is in line with Article 178 of the Credit Risk: Internal Ratings Based Approach (CRR) Part;

(b) verify whether the definition of default used in external data is consistent with the definition of default as implemented by the firm for the relevant portfolio of exposures, including in particular:

i. the counting and number of days past due that triggers default;

ii. the structure and level of any materiality thresholds for past due credit obligations;

iii. the definition of distressed restructuring that triggers default, the type and level of specific credit risk adjustments that triggers default; and

iv. the criteria to return to non-defaulted status.

(c) document sources of external data, the default definition used in external data, the performed analysis, and all identified differences.

4.2 For each difference identified in the definition of default resulting from the assessment of paragraph 4.1, firms should do both of the following: