New Definition of Default

The new definition of default provides that, for the purpose of calculating the minimum mandatory capital requirements for banks and financial intermediaries, borrowers shall be classified as non-performing if at least one of the following conditions is met:

1. the debtor is more than 90 days past due (in some cases 180 days, such as for public sector entities) in the payment of a material obligation, as defined below;

2. the bank considers it unlikely that, without resorting to actions such as the enforcement of collateral, the debtor will fully meet its obligation.

Condition 2) is already in effect and remains unchanged.

With regard to condition 1), a past-due debt is considered significant when the amount in arrears exceeds both of the following thresholds:

• 100 euros for retail exposures (to households and small and medium-sized enterprises¹), and 500 euros for non-retail exposures—absolute materiality threshold;

• 1 percent of the total exposure to the counterparty—relative materiality threshold.

Once both thresholds are exceeded, the count of 90 (or 180) consecutive days past due begins; after this period, the debtor is classified as in default for the entire exposure.

It should also be noted that for joint obligations (so-called “joint accounts”), the new regulations provide for certain rules regarding the automatic propagation of default status:

• if the joint account is in default and the exposure is of a material amount, the status is automatically applied to the individual joint account holders;

• if all co-debtors are in default, that status also applies to the joint account.

Once the arrears have been settled and at least 90 days have passed since such settlement without any further arrears or adverse events occurring, the default report will be removed.

1 Individuals, business owners, self-employed professionals, sole proprietorships, and companies with annual revenue of less than 5 million euros and exposure to the bank of less than 1 million euros.