New European Rules on Default

Starting from 1 January 2021, the Cassa Centrale Group shall apply the new European rules on the classification of defaulted clients.

Introduced by the European Banking Authority to harmonise the practices of credit institutions in EU countries, the new rules establish more restrictive standards and methods for the classification of default compared to the ones used so far.

Consequences of the new rules

Under the new rules, effective 1 January 2021, even just overdrafts, exceeding the new thresholds set for natural persons, SMEs, and businesses, can cause all exposures to the CCB Group to be classified as defaulted and could make it harder to access credit and obtain new financing.

 

Your Manager and/or Branch are at your complete disposal to fully support you at this time of major change, provide clarification on the new rules, and find the solutions that best suit your needs.

MAIN CHANGES

How to classify exposures as past due

Up to December 2020
The bank shall classify the client as defaulted in the event they are more than 90 days past due on the payment of principal, interest, or fees amounting to at least 5% of the client's total exposures to the bank

CUnder the new rules
The bank shall classify the client as defaulted in the event they are more than 90 consecutive days past due on the payment of principal, interest, or fees for an amount exceeding both the following thresholds:

  • in absolute terms: €100 for retail exposures (Natural Persons and SMEs – classified as “retail”) and €500 for other exposures;
  • in relative terms: 1% of the overall amount of all the client's exposures to the CCB Group (including Banks and other Specialist Financial Product Companies, e.g. Leasing, Consumer Credit)
Netting of credit facilities

Up to December 2020
To determine the past due amount, the CCB Group Banks shall offset past due exposures on specific credit facilities against any margins available on other credit facilities with the same counterparty on a daily basis.

Under the new rules
Netting is no longer allowed under the new rules. CCB Group Banks (including other Specialist Financial Product Companies, e.g. Leasing, Consumer Credit) shall classify clients as defaulted even if there are available balances on other unused credit facilities.

When a counterparty is no longer classified as past due

Up to December 2020
A counterparty shall be no longer classified as past due and become once again performing when, after paying off arrears, the amount more than 90 days past due is settled or the ratio between the past due amount and the overall amount of credit exposures that the Group's Bank has to such counterparty falls below the 5% materiality threshold

Under the new rules
A counterparty shall be no longer classified as past due and become once again performing when, for at least 3 months, any past due amount related to the position never exceeds both the absolute and relative materiality thresholds at the Group level at the same time

Default contagion events

Up to December 2020
The default shall not automatically spread in the case of joint obligations (so-called “joint obligation”) to the joint obligors (and vice versa) or, in the case of a partnership's default, to the partners who have unlimited liability for the partnership's obligations

Under the new rules
In the case of joint credit obligations (e.g. joint obligations where two or more obligors are jointly responsible for their repayment), the default of one obligor shall not automatically spread also to joint obligations. In the event all obligors exposed jointly have been classified as defaulted, the joint obligation shall be automatically considered defaulted; similarly, where the joint obligation has been classified as defaulted, also the obligations of all individual obligors shall be considered defaulted if the obligation is a material part of the total exposures of the individual obligor.

With respect to the default of a Partnership, the contagious effect shall automatically apply to the exposures of partners who have unlimited liability for the partnership's obligations

Debt renegotiation due to financial problems

Up to December 2020
The counterparty shall not be automatically classified as defaulted in in the event of debt renegotiation due to financial problems of the counterparty (so-called “forbearance measure”)

Under the new rules
The counterparty shall be classified as defaulted in the event any debt renegotiation due to financial problems of the counterparty (so-called “forbearance measure”) causes a loss to the Group of more than 1%

LEGAL BACKGROUND

Starting from 1 January 2021, the Cassa Centrale Banca Group shall apply the new European rules on the classification of a client defaulting on a credit facility provided by the bank (so-called “default”), laid down by the European Banking Authority (EBA) in the following regulations and transposed into Italian law by the Bank of Italy:

  • European Union Regulation of 26 June 2013 – no. 575 – art. 178 – introduces specific provisions on the default of an obligor
  • European Union Delegated Regulation no. 171 of 19 October 2017 – establishes the standards that supervisory authorities shall use for the materiality threshold
  • European Commission Recommendation 2003/361/EC of 6 May 2003 – definition of Small and Medium-Sized Enterprise
  • EBA/GL/2016/07 – EBA Guidelines on the application of the definition of default under Article 178 of Regulation (EU) no. 575/2013

The new rules, known as “New Definition of Default”, establish more restrictive standards and methods compared to the ones in use today with the goal of harmonising rules across the European Union.