Eba Gl on the Application of the Definition of Default
-
11 Before 1 January 2021, default status expires if the debtor pays the overdue payment to the intermediary and/or covers the overdraft account. In this article, we will also highlight relevant aspects of harmonizing standard definition in accordance with DoD, IFRS9, and NPL regulations. On 28 September 2016, EBA published Guidelines 2 on the definition of failure and technical standards on the materiality threshold. On 26 June 2019, the Bank of Italy published a Specific Communication 3 on the implementation of the CRR and the EBA Guidelines on the definition of impaired credit risks with regard to supervisory statistical reports and financial statements of banks. During this 3-month probationary period, financial intermediaries assess the debtor`s behaviour and overall financial situation and only allow the return to a non-default status if it is effectively and durably considered stable. Mention should be made, inter alia, of the lack of recognition of the position in the intermediary`s income statement due to the decrease in the solvency of the credit obligation, the transfer of the claim to the intermediary (in particular with regard to securitisation transactions 8), the existence of specific risk requirements under IFRS9 accounting principles, a non-performing debt restructuring 9, bankruptcy or similar provision or protection of the Debtor, a significant increase in the debtor`s financial leverage and the reduction of sources of income. If any of the above indicators occur, all claims against the debtor are deemed to be in default. Credit institutions and investment firms (institutions) falling within the scope of the CRR as regards the definition of default used for the purposes of the standard credit risk approach and the IRB approach. 2 www.eba.europa.eu/sites/default/files/documents/10180/1597103/004d3356-a9dc-49d1-aab1-3591f4d42cbb/Final%20Report%20on%20Guidelines%20on%20default%20definition%20%28EBA-GL-2016-07%29.pdf?retry=1. Guidance on the application of the definition of default: Although these aspects are not disclosed per se in IFRS9 (clause 5.5), it seems reasonable to expect that these amendments will be in accordance with IFRS9. The harmonisation of defaults and reduced credit loans could take into account the following aspects: in paragraphs 36 to 39 of the EBA Guidelines for the application of the DoD in accordance with Article 178 of Regulation (EU) No Directive 575/2013 (GL/2016/07) requires institutions to treat a risk as impaired under IFRS9 (i.e.
assign it to Level 3), such exposure should be considered a standard, except in certain cases. In parallel with these documents, the EBA published the results of a Quantitative Impact Assessment (QIS) to assess the impact of certain policy options on regulatory capital requirements in order to harmonise the definition of default. In order to reduce the discretion granted to each intermediary in the assessment of a potential default, the EBA Guidelines provide for certain qualitative and quantitative guidance that intermediaries must take into account in order to reduce an unlikely redemption position to the default category. In addition to the amended definition of default, the Council of the European Union has developed an action plan to combat non-performing loans (“NPLs”) in Europe and reduce the rise in NPL rates in the banking sector. This has led to new rules and guidelines that should be closely aligned with the new DoD and IFRS9 regulations: this warning addresses the new definition of default for regulatory purposes, which came into force on 1 January 2021 and applies to all European financial intermediaries. Both the guidelines and the RTS will harmonise the definition of failure across the EU. It would be easy to conclude that it is difficult for institutions to adjust the Department of Defence`s definition and the definition of credit impairment under IFRS Level 3. In particular, the following three areas of change within the DoD are driving these challenges: With a strong correlation between failure and non-performance, the implementation of this regulation and guidelines requires judicious planning and adjustment. Although the corporate governance guidelines are already in effect as of June 30, 2019, many guidelines have not yet been fully implemented within banks.
In addition, with the expected implementation date of the lending guidelines being June 30, 2020, it is strongly recommended to create consistent planning to maximize efficiency and consistency in the implementation of the DoD and NPLs. The proposed new regulatory structure establishes objective and subjective conditions under which a debtor may be considered insolvent. In addition, certain materiality thresholds have been introduced which must be exceeded for the debtor`s status to take effect. EU Regulation of 26 June 2013, No 575 1 on prudential requirements for credit institutions and investment firms (CRRs), introduces into Article 178 specific provisions on debtor default and instructed the European Banking Authority (EBA) to issue guidelines for the application of the definition of default and the European Commission to adopt a delegated regulation on the assessment of the materiality threshold for loans pending on the basis of the regulatory technical standards published by EBA. Under the new rules, intermediaries will have to examine the relationships between their customers in order to identify cases where the failure of a company may have a negative impact on the ability of another debtor associated with it to repay (the so-called contagion effect), so that this can also be considered a default. .