New Definition of Default

MBFACTA, as part of the Mediobanca Group, applies the new European rules on the classification of counterparties in default on an obligation to the bank, drawn up by the European Banking Authority (EBA).

As of 1 January 2021, these rules are required to be applied by the entire banking system.

The new rules, known as the "New Definition of Default", establish more restrictive criteria for classification “in default” than those previously adopted, with the aim of harmonising regulations across EU countries.

The new rules

Understanding the main changes introduced by the new default classification rules is essential to knowledgeably manage financial relationships.

Materiality thresholds

The Factor is required to classify the debtor counterparty as in default if the following materiality thresholds are exceeded for more than 90 consecutive days:

  • for individuals and SMEs: arrears of at least €100 and greater than 1% of total exposures to the Factor;
  • for other companies: arrears of at least €500 and greater than 1% of total exposures to the Factor.

 

While the previous definition of default referred to the earliest date of default for the purpose of calculating the start date of overdue payments, the new definition is based on the continuous presence of arrears above the threshold for a period of at least 90 days.

Furthermore, it remains among the Factor's duties to report a debtor counterparty as in default if, even in the absence of amounts past due for 90 days, it is likely to default on a credit obligation.

Offsetting

The new rules do not allow the offsetting of past due amounts: the Factor is required to classify the debtor counterparty as in default even if there are other unused credit lines available.

Cure period

The state of default remains for at least 90 days ("cure period") from the time when the debtor counterparty settles the past due payment with the Factor. Longer maturity periods of at least 12 months continue to apply to default positions subject to forbearance measures (i.e. classified as forbearance). After this period, if the conditions for classification as in default no longer apply, the position is classified as performing.

The impact on reports in the Central Credit Register

The new default rules have a very limited impact on the representation of clients in the information of the Central Credit Register which the Bank of Italy makes available to intermediaries for "creditworthiness" assessments.

Some advice:

  • Knowledgeable management of debt positions is essential to avoid incurring overdrafts or overdue amounts that could make it more difficult to access credit or take out new loans.
  • The utmost care must be taken to meet payment deadlines on time.
  • If payment is delayed beyond the due date, the amount due should be paid up as quickly as possible in order to avoid the persistence of a situation of arrears that could lead to a default report.
  • Remember that we are always available to support you in identifying the products and solutions best suited to meet your needs.
To find out more

You may consult: A simple guide to the new European default rules

 

The relevant legislation consists of: EBA/GL/2016/07 (Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013); EU Delegated Regulation No. 171/2018 of the European Commission of 19 October 2017; Regulation (EU) 2018/1845 of the European Central Bank of 21 November 2018; Bank of Italy, "Application of the definition of default pursuant to Article 178 of Regulation (EU) No. 575/2013 and adaptation of the definitions of impaired credit exposures", 15 October 2020.