The New European Rules on Default

Get to know them and protect your undertaking

The European Banking Authority (EBA) has introduced new rules for the classification as defaulted of counterparties that fail to fulfil their obligations.

The new rules envisage a stricter definition of the amount past due and meet the regulator’s goal to harmonise the definition of default among European financial institutions.

What changes with the new rules on Default?

  • The term “significant amount past due” means an amount of over 500 euros[1] (that relates to one or more accounts[2]) which represents more than 1% of the undertaking’s exposures to the Bank;
  • The conditions for the classification of the client as defaulted are assessed at Banking Group level;
  • The Group classifies the client as defaulted if the payment is past due for over 90 consecutive days;
  • It will no longer be possible to use margins that are still available on credit lines that have not been used to compensate the failure to fulfil existing obligations on individual accounts and avoid being classified as defaulted;
  • The defaulted status will persist for at least 90 days from the time the client regularises the payment past due to the Bank and there are no further prejudicial events.

In case of joint accounts, the default could involve both such accounts and the accounts of the individual joint holders.

Lastly, in case of a request to restructure the credit due to financial difficulties, the new rules impose the classification of a client as defaulted if such restructuring results in a loss for the Bank/Company that exceeds 1% of the net present value of cash flows.

 

[1] The threshold of 500 euros is reduced to 100 euros for natural persons and for SMEs whose total exposures to the Bank do not exceed 1 million euros.

[2] In the case of advances with recourse, the amount past due is represented by the surplus of the advances compared to the advance fee agreed between the factor and the assignor

When will Banca Ifis adopt the new definition of default?

Banca Ifis will apply the new rules as of 1st January 2021.

From this date, the indebtedness of a client undertaking, if the payments past due exceed the threshold envisaged by the regulatory framework, will be reported to the Bank of Italy’s Central Credit Register as a non-performing activity and this could have negative effects on their ability to access credit, such as, for example, the difficulty to obtain new loans.

It is, therefore, fundamental that contractually envisaged payment deadlines be strictly complied with and that you are not late with payment of your debts, even if they are of a small amount.

Avoid default - a concept map to guide you

* SMEs whose total exposures to the Bank do not exceed 1 million euros shall be considered to be in default when the sum of all payments to the bank that are past due exceeds 100 euros.

Do you have questions or would you like more information?

For further detailed discussion of this subject, to consult the FAQs or for more information, please download the “Simple guide to the New European Rules on Default”.