The Bank of Italy clarified the application of the definition of “Default” pursuant to Article 178 of EU Regulation No. 575 of 2013

Prepared by Cristian Sgaramella, Giovanni Bombaglio and Francesca Scarabello

With a recent memorandum, following updates dated 23 September 2022, Bank of Italy provides some guidelines on the application of “Delegated Regulation (EU)” No. 171/2018 on the relevant threshold for credit obligations in default pursuant to Article 178 (par. 2) – (lett. D) CRR, as well as clarifications in relation to the implementing provisions of the EBA (European Banking Authority) guidelines on the application of the definition of Default.

In order to provide a better comprehension, it should be pointed out that, also following the effective date of the new European rules contained in “Delegated Regulation (EU)” No 171/2018 of 19/10/2017, the default status subsists whenever:

(1) the recovery of the claim by the bank is subject to the prior enforcement of the outstanding guarantees, or

(2) the debtor has been in default on its payment obligations for more than 90 days with regard to a material outstanding debt.

The level of relevance of the exposure for individuals and SMEs has been identified with two components: (i) an overall one equal to €100 and (ii) a relative one equal to 1% of the total amount of the client’s exposures to the same banking group. For corporate exposures, the aforementioned features are: (i) an absolute one of €500; and (ii) a relative one of 1% of the client’s total exposure to the same banking group.

A. About the so called past-due Terms

The calculation of Terms

With regard to a purchased receivable recorded on a Factor’s balance sheet, according to Paragraph 28 of the EBA Guidelines (or also “EBA LG”), the computation of past-due days should start since the receivable becomes due, and therefore should start from the day after the due date of the invoice (not from the date of purchase or expected collection of the debt, as previously stated).

With regard to claims against Public Administrations, Paragraph 16 EBA LG provides that the counting of days past due starts since the date on which ‘the amount of principal, interest or fees has not been paid at the date on which it was due’, e.g.  in this case by the time it becomes due, as above.

Therefore, even for trade receivables whose debtor is a Public Administration, unless otherwise specifically provided for by law, the term doesn’t begin with the ending of the “payment procedures” provided for by the public accounting rules, but with the due date of the single payments (Art. 16 LG EBA).

Suspension and amendment of Terms

Several clarifications are provided in the memorandum about the suspension of default terms.

First, the suspension applies in the case of moratoria set by law.

Moreover, according to Paragraph 19 of the EBA LGs, the standstill of time limits works upon the fulfillment of the following two conditions:

 (1) a dispute/ an objection by the debtor as to the amount of the sum due;

(2) launch of an out-of-court or in-court dispute suitable to result in a binding decision between the parties.

The mentioned provision can only be applied to debtors that are not in a state of default. In fact, the presence of a dispute between the debtor and the creditor bank over the claim that arose after the classification in default according to the past-due criteria does not allow the reclassification in a state of non-default and the subsequent application of par. 19 LG EBA for the suspension of the term.

The EBA also specifies that the suspension can only apply to the portion of the claim that is actually disputed and will last until the dispute is resolved. For example, disputes concerning only interest do not affect the calculation of days past due of principal.

Finally, in accordance with par. 16 EBA LG, if there are changes to the payment schedule, the calculation of the terms will be based on the modified schedule also at the request of the debtor.

Consequently, the calculation of days past-due will have to be made on the basis of the new deadlines (par. 17 EBA LG).

B. About the calculation of the thresholds and quantification of the credit obligation in default

According to the Bank of Italy, the relevance of a credit exposure for the purposes of classifying a debtor into default must always be evaluated by reference to the overall exposure of the banking group to the same debtor.

The classification of a debtor so determined is reflected in the classification at the individual level.

In addition, all credit exposures recorded on the balance sheet, and thus also exposures relating to cash advances or delegated payments recorded on the balance sheet, must be taken into account in calculating the exposure relevance.

Combined Credit Obligations

The Bank of Italy has clarified that the aggregate amount in the case of “Combined Credit Obligations” must be considered for the relevance calculation. Therefore, if the calculation shows that there is a material past due amount of more than 90 days, all “Combined Credit Obligations” must be considered in “default”.

The notion of materiality of a Combined Credit Obligation states that a combined obligation is “immaterial” with regard to the total obligations of the obligor if its inclusion in the amount of the total outstanding credit obligation (numerator of the threshold) and in the total amount of all exposures to the individual obligors involved (denominator of the threshold) is not decisive for exceeding the materiality threshold.

C. Conclusions

Finally, the aforementioned provision appears, on the one hand, abstractly suitable to significantly affect the credit relations between intermediaries and their customers due to the increase that the factoring facility is recording during the year (especially with regard to small and medium-sized companies that use the factoring facility as a way to finance their working capital) and, on the other hand, since once the so-called “moratoria” have expired, banks will have to carefully evaluate (and possibly re-classify) each individual credit line that benefited from them.

Equally important seems to be the risk of a significant increase in case law and legal disputes on the issue (even contradictory between them at an early stage) that might arise in relation to the provision of Par. 19 of the EBA LGs.

Let’s Talk

For a deeper discussion, please contact:

Cristian Sgaramella

PwC TLS Avvocati e Commercialisti