The document outlines a new definition of default sources and the main changes introduced, effective January 1, 2021, regarding credit obligations past due. It establishes new materiality thresholds for classifying exposures as past-due and provides objective criteria for determining when a party is unlikely to pay. Additionally, it details conditions under which a defaulted obligor can return to performing status and introduces specific calculations for loss and diminished financial obligations.

1. 0
New Definition of Default
Sources, Main Changes and Alignment Process
July 2018

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.