New definition of default

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

1. The debtor is more than 90 days in arrears (in some cases 180 days, e.g. for public administrations) in the payment of a material obligation, as defined below;
2. The bank considers that it is unlikely that the obligor will fulfil its obligation in full without recourse to actions such as the enforcement of collateral.

Condition (2) is already in place and does not change in any way. As regards condition (1), a past due debt is to be considered material when the amount of the arrears exceeds both of the following thresholds:

• € 100 for retail exposures (to households and small and medium-sized enterprises ^[1]), and € 500 for non-retail exposures – absolute materiality threshold;
• 1 % 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 (so-called “joint liability”), the new rules provide for certain rules for the automatic propagation of the default status:

• If the joint liability 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 joint holder.

Once the arrears have been settled and at least 90 days have elapsed since such settlements without the occurrence of further arrears or other detrimental events, the default report will lapse.

[1] Individuals, company owners, self-employed professionals, sole proprietorships and companies with a turnover of less than € 5 million and exposure to the bank of less than € 1 million.