New definition of default

As of 1 January 2021, the new definition of default provided for in the European Regulation on prudential requirements for credit institutions and investment firms came into force. The new definition of default does not substantially change the reporting to the Central Risk Office, which is used by intermediaries in the process of assessing the creditworthiness of customers. 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, and affects the credit relationship between the bank and its customers, the management of which aims to ensure the regularity of the credit relationship.

Main changes

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.

Why it is important to know the new default rules

It is essential to adhere to your debt repayment schedule and contractually agreed payment deadlines on time, not forgetting even small amounts, in order to avoid default classification.

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In order to receive instructions on how to send the forms and for further information, applicants are invited to contact their contact manager. Please note that, following the Group’s reorganisation project, the Master and Special Servicing activities on securitised loans have been transferred to the Gardant Group, whose contact centre can be reached from Monday to Friday on 800 688 375.