Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

New Definition of Default

134 views

Published on

a short deck summarising the main aspects involved with the alignment to the EBA guidelines on the default definition application. Details are provided on:
the past due threshold,
the technical past due cases
the unlikely to pay indicators
the criteria for coming back to performing status

Published in: Economy & Finance
  • Be the first to comment

New Definition of Default

  1. 1. 0 New Definition of Default Sources, Main Changes and Alignment Process July 2018
  2. 2. 1 REGULATION (EU) [2018/XX*] OF THE EUROPEAN CENTRAL BANK of [date Month 2018] exercising a discretion under Article 178(2)(d) of Regulation (EU) No 575/2013 in relation to the threshold for assessing the materiality of credit obligations past due delegated regulation Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013(EBA/GL/2016/07) guidelines COMMISSION DELEGATED REGULATION (EU) 2018/171 of 19 October 2017 on supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for the materiality threshold for credit obligations past due RTS Sources
  3. 3. 2 Take Aways Date of Application Main changes introduced • 1°January 2021 • New materiality thresholds to flag exposures as Past-due 90 • New binding definition of technical past due (numerus clausus) • New and objective criteria to establish a counterpart being Unlikely to pay • New and objective criteria to come back to performing status Scope • Internal Ratings Based Approach (IRB Approach)
  4. 4. 3 3 New materiality thresholds to flag exposures as Past-due 90 limit to the sum of all past due amounts related to the credit obbligations of the borrower Absolute threshold sum of all past due amounts related to the credit obbligations of the borrower Relative threshold Total amount of all on-balance seet exposer to the obbligor* * Excluding equity exposures A default shall be considered to have occurred when the obbligor is past due more than 90 days on any material credit obbligation
  5. 5. 4 4 New materiality thresholds to flag exposures as Past-due 90 Counting of days past due starts when both thresholds are breached Specific provisions are given for suspensions of counting days past due • Contractual agreements (forbearance excluded) • Law provisions • Disputes
  6. 6. 5 5 Absolute Relative ref Retail 100 EUR 1% Delegated regulation Non retail 500 EUR 1% Delegated regulation New materiality thresholds to flag exposures as Past-due 90 values
  7. 7. 6 6 New binding definition of technical past due (numerus clausus) A technical past due situation should only be considered to have occurred in any of the following cases: • Data or System error (including manual errors) – wrong credit decisions excluded • Failure of payment system or late execution of payment ordered • Time lag between payment and debt matching • For Factoring agreement (pro soluto): • Factoring products PD 90 • No other receivable > PD 30
  8. 8. 7 7 New binding definition of technical past due (numerus clausus) Detected technical past due should be rectified not considered for IRB models estimation purposes
  9. 9. 8 8 New and objective criteria to establish a counterpart being Unlikely to pay where interest related to credit obligations is no longer recognised in the income statement Where te exposure is assigned to Stage 3 as defined in IFRS 9 should be considered defaulted Where a credit obligation is sold due to credit risk producing a material loss Where forbearance measures resulsts in materially diminished financial obligation Where obligor has been placed in bankruptcy Other possible indicators
  10. 10. 9 Loss computation: L = 𝐸−𝑃 𝐸 where: L is the economic loss related with the sale of credit obligations; E is the total outstanding amount of the obligations subject to the sale, including interest and fees; P is the price agreed for the sold obligations. 9 New and objective criteria to establish a counterpart being Unlikely to pay Where a credit obligation is sold due to credit risk producing a material loss Sale of credit obbligation Due to increased credit risk? Yes No loss > 5% ? Yes No BonisDefault Bonis
  11. 11. 10 10 New and objective criteria to establish a counterpart being Unlikely to pay Where forbearance measures resulsts in materially diminished financial obligation Diminished Financial Obbligation 𝐷0 = 𝑁𝑃𝑉0 − 𝑁𝑃𝑉1 𝑁𝑃𝑉0 where: DO is diminished financial obligation; NPV0 is net present value of cash flows (including unpaid interest and fees) expected under contractual obligations before the changes in terms and conditions of the contract discounted using the customer’s original effective interest rate; NPV1 is net present value of the cash flows expected based on the new arrangement discounted using the customer’s original effective interest rate. Forbearance measures on a credit obbligation Diminished Financial obligation more than 1%? Yes No BonisDefault
  12. 12. 11 11 New and objective criteria to establish a counterpart being Unlikely to pay Where forbearance measures resulsts in materially diminished financial obligation Where the institution has reasonable doubts with regard to the likeliness of repayment in full of the obligation according to the new arrangement in a timely manner, the obligor should be considered defaulted. The indicators that may suggest unlikeliness to pay include the following: (a) a large lumpsum payment envisaged at the end of the repayment schedule; (b) irregular repayment schedule where significantly lower payments are envisaged at the beginning of repayment schedule; (c) significant grace period at the beginning of the repayment schedule; (d) the exposures to the obligor have been subject to distressed restructuring more than once.
  13. 13. 12 12 New and objective criteria to establish a counterpart being Unlikely to pay Other possible indicators The possible indications of unlikeliness to pay that could be considered by institutions on the basis of internal information include the following: (a) a borrower’s sources of recurring income are no longer available to meet the payments of instalments; (b) there are justified concerns about a borrower’s future ability to generate stable and sufficient cash flows; (c) the borrower’s overall leverage level has significantly increased or there are justified expectations of such changes to leverage; (d) the borrower has breached the covenants of a credit contract; (e) the institution has called any collateral including a guarantee; (f) for the exposures to an individual: default of a company fully owned by a single individual where this individual provided the institution with a personal guarantee for all obligations of a company;
  14. 14. 13 13 New and objective criteria to come back to performing status The defaulted obbligor should be classified as non-defaulted if: All exposures not forborne 90gg with no default trigger (no PD 90 no Utp indicators) no worrying behaviour no worrying financial situation
  15. 15. 14 Material payment computation: a total equal to the amount that was previously past-due (if there were past-due amounts) or that has been written-off (if there were no past-due amounts) under the restructuring measures 14 New and objective criteria to come back to performing status The defaulted obbligor should be classified as non-defaulted if: Forborne exposures 360gg with Regular payments No defaults triggers (no PD 90 no Utp) no worrying financial situation Material payment in the period
  16. 16. 15 15 New and objective criteria to come back to performing status Forborne exposures Counting of 360 days should start from the last of the following eventes: (a) the moment of extending the restructuring measures; (b) the moment when the exposure has been classified as defaulted; (c) the end of the grace period included in the restructuring arrangements.

×