January 2021Starting January 1, 2021, Solution Bank applies the new European rules for classifying counterparties as defaulted on their obligations towards the bank (the so-called “default”), introduced by the European Banking Authority (EBA) and implemented at the national level by the Bank of Italy. The new regulation, known as the “New Definition of Default“, establishes stricter criteria and methods for default classification compared to those previously used, with the goal of harmonizing regulation across different EU countries. Understanding the new rules is crucial to avoid being classified as default, even for minor account overdrafts or small overdue payments. The new rules apply to both businesses and individuals with access to credit and require that the bank automatically classify the exposure as “default” in the event of overdue payments of principal, interest, or fees for a amounts exceeding both of the following thresholds for more than 90 consecutive days:

• in absolute terms: €100 for retail exposures (individuals and SMEs) and €500 for other exposures;
• in relative terms: 1% of the total amount of all the customer’s exposures towards the bank.

The regulations no longer allow for offsetting. The bank is required to classify the customer as in default even if there are unused credit lines available. The new rules also introduce a new threshold for default classification in cases where credit terms are adjusted due to the customer’s financial difficulties (forbearance measures). If, as a result of such adjustments, a loss exceeding 1% occurs, the bank must classify the customer as in default. Under the new rules, in the case of joint credit obligations (e.g., co-signatures where two or more debtors are jointly responsible for repayment), the default of one debtor does not automatically extend to co-debtors. If all jointly exposed debtors are classified as in default, the joint obligation is also considered in default. Conversely, if a joint obligation is classified as in default, all obligations of individual debtors are considered in default if the joint obligation is significant relative to the total exposures of the individual co-debtor. For partnerships, the default classification automatically applies to the exposures of the partners who are jointly and severally liable for the partnership’s obligations. To return to a non-default status, it is necessary to settle the arrears with the bank and remain free of credit anomalies for at least three months. Solution Bank branches are fully available to provide the utmost support during this important phase of change, offer clarifications on the new regulations, and identify the most suitable solutions for client needs.

The relevant regulations

• Regulation (EU) No 575/2013 of June 26, 2013 – Article 178 – introduces specific provisions on the default of a debtor
• EU Delegated Regulation No. 171 of October 19, 2017 – defines the criteria for setting the materiality threshold that supervisory authorities must adhere to
• European Commission Recommendation 2003/361/EC of May 6, 2003 – Definition of Small and Medium-sized Enterprises (SMEs)
• EBA Guidelines EBA/GL/2016/07 – EBA Guidelines on the Application of the Definition of Default under Article 178 of Regulation (EU) No 575/2013
• For further details, please also visit the Bank of Italy’s website: https://www.bancaditalia.it/media/notizie/2020/qa-nuova-definizione-default/index.html