European default rules

From 1 January 2021, CDP will apply the new European rules on the classification of counterparties in default in relation to an obligation to the bank introduced by the European Banking Authority (EBA).

The new regulation, known as the New Definition of Default, establishes more restrictive criteria and methods for default classification than those adopted until now, with the aim of harmonising the regulations across the various member states of the European Union.

 

What are the rules

The main changes introduced mean that CDP will be required to report a company as defaulting with arrears:

  • from over 90 days (*)
  • on amounts over 500 euros (**) (so-called absolute)
  • for a share higher than 1% of the total cash exposure to CDP and its Group (***) (so-called relative threshold)

After at least 90 days from the regularisation of the arrears, without any further arrears situations or further detrimental events occurring, the default reporting will lapse.

 

Why it is important to understand and follow the rules

In light of the new legislation, it is important to punctually meet the payment deadlines provided for in your contract and respect your debt repayment schedule, even for modest amounts, to avoid default classification with possible repercussions on your possibility to access credit.
Default of one position leads to the automatic default of all the customer's outstanding exposures.
 

To find out more about the rules

For further information, the reference legislation is as follows:

  • European Union Regulation of 26 June 2013 - No. 575 - Art. 178, which introduces specific provisions for debtor default
  • EBA/GL/2016/07 “Guidelines on the application of the definition of default under Art. 178 of Regulation (EU) No. 575/2013”
  • Delegated regulation of the European Union No. 171 of 19 October 2017, which defines the criteria for setting the materiality threshold, to which the supervisory authorities must comply
  • EBA/RTS/2016/06 “New Regulatory Technical Standards on the materiality threshold for past due credit obligations” which supplement the EU Delegated Regulation No. 171/2018 of the European Commission of 19 October 2017
  • European Commission Recommendation 2003/361/EC of 6 May 2003, for the definition of Small and Medium-sized Enterprises

 

Contacts

For further information on regulatory changes, you can contact your reference Manager.

 

(*) The legislation provides for only three technical arrears situations in which the customer will not be considered in default: 1. failure of the payment system; 2. delayed execution of a client order; 3. errors in internal processes that lead to a delay or incorrect crediting of the payment made
(**) The threshold is reduced to 100 euros for individuals and small and medium-sized enterprises
(***) The exposure considered in the calculation includes all existing positions towards CDP and its Group

If a customer has an overdue exposure or an exposure in arrears for more than 90 days for an amount below the materiality threshold, should they be classified as defaulting?
If there are no other assessments on the likelihood that the customer will not fulfil their obligations, they need not necessarily be classified in default. For an automatic default classification, the amount in arrears/overdue for more than 90 consecutive days must exceed the materiality thresholds established by European regulations. 

The arrears, in relation to one or more existing loans, must be higher than an absolute threshold (equal to 500 euros for companies and 100 euros for individuals and small and medium-sized enterprises) and must at the same time represent more than 1% of the total of exposures to CDP and its Group.

How are days past due calculated?
Days past due or in arrears are calculated starting from the day following the date on which the amounts due for the principal, interest and commissions have not been - even partially - paid. In the event that the payments due, as defined in the contract, have been suspended and the deadlines have been changed, the count of the days past due follows the new repayment plan, meaning that the period subject to suspension/renegotiation is not considered for the purposes of the aforementioned calculation

Can past due amounts be offset with other credit lines not used by the same obligor?
The European Banking Authority has expressly excluded this possibility. Therefore, unlike in the past, CDP will be required to classify a company in default even if it has credit lines still available with CDP itself that could be used to offset existing defaults and avoid a default classification

For exposures contracted by two or more obligors, jointly liable for the repayment of the same (joint obligors), what happens in the event of default of one of the obligors?
In the case of joint credit obligations, such as joint obligors where two or more obligors are jointly liable for the repayment of the same, the default of an obligor does not automatically extend to joint obligors. In the event that all the obligors jointly exposed are classified in default, the joint obligation is also automatically considered in default; similarly, if the joint obligation is classified in a state of default, the obligations of all the individual obligors are also considered in default

In the event of delayed payment collection, does CDP still have to consider the customer in default?
There are specific technical arrears situations for which the customer will not be considered in default: 1. Failure of the payment system; 2. Delayed execution of a client order; 3. Errors in internal processes that lead to a delay or incorrect crediting of the payment made

How long does it take for CDP to reclassify the customer as non-defaulting?
According to the new regulation, to return to a non-defaulted status, at least three months must elapse from the moment when the conditions for classifying the customer in default no longer exist. During this period, CDP assesses their conduct and financial situation and, after three months, it can reclassify the customer as non-defaulting if it considers that the improvement in the latter’s credit quality is effective and permanent. The case of distressed restructuring is an exception, for which the period is twelve months instead of three

Does any default on a single exposure entail the automatic default of all the customer's outstanding exposures to CDP?
Yes, if the materiality thresholds are exceeded and the arrears/overdue status remains continuous for 90 days

In addition to the arrears/overdue criterion, in what other situations can the obligor be declared in default?
Although a customer has not had significant arrears for more than 90 days, they could be classified in default if CDP deems it unlikely that its credit will be recovered without resorting to any guarantees. The new legislation has made the rules for the assessment of these default events more stringent

What is the impact of the new default definition on the information held on the Central Credit Register shared between participating intermediaries and used by them to assess customer creditworthiness?
The impact of the new default definition is very limited in relation to the information held on the Central Credit Register shared with intermediaries. Indeed, the new legislation:

  • does not change the current assessment criteria for the purposes of classifying a customer as a "non-performing", except that intermediaries belonging to a banking or financial group must take into account all information (positive and negative) available at group level
  • does not affect the category of "persistent defaults" which continue to follow an objective criterion linked exclusively to the maturity date of the repayments provided for in the loan agreement, without taking into account the new significance thresholds (relative and absolute)