New definition of default

New definition of default

As of 1 January 2021, the new definition of default set out in the European Regulation on prudential requirements for credit institutions and investment firms comes into force. The new definition of default does not fundamentally change the reporting to “Centrale dei Rischi”, the database used by intermediaries in the process of assessing the customers’ “creditworthiness”. It only concerns the way in which banks and financial intermediaries must classify customers for prudential purposes, i.e. for the purpose of calculating the minimum capital requirements for banks and financial intermediaries.

Main changes

The new definition of default provides that, for the purposes of calculating the minimum regulatory capital requirements for banks and financial intermediaries, debtors are classified as impaired (default) if at least one of the following conditions is met:

  1. The obligor is more than 90 days (in some cases 180 days, e.g. government) in arrears on a material obligation, as defined below;
  2. The bank considers that it is unlikely that the obligor will perform its obligation in full without recourse to actions such as the enforcement of collaterals.

Condition 2) is already in force and does not change in any way.
With respect to condition (a), a past due debt should be considered material when the amount of the arrears exceeds both of the following thresholds:

  • EUR 100 for retail exposures (households and small and medium sized enterprises), and EUR 500 for non-retail exposures – absolute materiality threshold;
  • 1 per cent of the total exposure to the counterparty – relative materiality threshold.

Once both thresholds are exceeded, 90 (or 180) consecutive days of past due status are counted, beyond which the debtor is classified as in default for the entire exposure.

It should also be noted that for joint obligations, the new rules provide for certain rules for the automatic propagation of the default status:

  • if the joint obligation is in default, and the exposure is of a material amount, the status is automatically applied to the individual joint holders;
  • if all joint holders are in default, the default status also applies to the jointly-owned entity.

Once the arrears have been settled and at least 90 days have elapsed since these regularisations without further arrears or further prejudicial events occurring, the notice of default shall lapse.

Why it is important to know the new default rules

It is essential to adhere to the repayment schedule of one’s debts and to the contractually agreed payment deadlines on time, not disregarding even small amounts, in order to avoid default classification.

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For any clarification, applicants are invited to contact their reference Asset Manager or to call the contact centre of Credito Fondiario S.p.A. from Monday to Friday at 800 688 375.