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Introduction
This alert considers the impact of the new definition of prudential default[1], in effect as of 1 January 2021, both in terms of its application to factoring transactions and in the context of exposures held by financial intermediaries towards public administrations.
The Italian application of the new European rules on default
Clarifications by the Italian Supervisory Authority
Bank of Italy, in a note originally published on 14 August 2020 and updated on 15 February 2021[2], provided some guidance on the application of Delegated Regulation (EU) no. 171 of 19 October 2017[3], regarding the materiality threshold for credit obligations in arrears pursuant to article 178, paragraph 2, letter d) of EU Regulation no. 575 of 26 June 2013[4] on prudential requirements for credit institutions and investment firms (CRR). The note also provides clarifications on the implementing provisions of the EBA Guidelines on the definition of default[5] (EBA GL).
Factoring
With particular focus on factoring transactions, the clarifications issued by Bank of Italy explain the time from which to start counting the days of arrears (to be equal to 90 consecutive days) in the event of a pro soluto purchase of a past due trade receivable, thus resolving the doubt between the date of purchase and the date of alleged collection.
Given that Paragraph 28 of the EBA LG envisages that this count - for a trade receivable acquired and recorded in the factor's financial statements - begins when the receivable becomes due, Bank of Italy has clarified that the count shall start from the day after the due date of the invoice. This on the assumption that the collectability of the receivable is generally independent of the date of purchase or the date of presumed collection indicated in the assignment agreement.
The public administration as debtor
The note published by the Italian Supervisory Authority analyses a series of aspects relating to the application of the new definition of default to exposures held by financial intermediaries towards public administrations.
I. Firstly, it is clarified whether the start of the calculation of days overdue in the case of trade receivables whose debtor is a public administration starts from the conclusion of the public expenditure procedure (e. from the issue of the payment authorisation by the debtor administration) or from the due date of the individual payments.
In this regard, it is noted that:
(i) under the EBA LG, days in arrears are counted from the time they become due under the law applicable to them[6];
(ii) with reference to exposures towards public administrations, the EBA LG grant a term of 180 days (instead of 90 days) under certain conditions[7], but they do not provide for exceptions or further specification.
Consequently, the date for calculating the days in arrears starts from the due date of the individual payments[8] unless specific laws provide otherwise. Moreover, the calculation does not change if the receivable has been acquired pro soluto as part of factoring transactions, in accordance with the provisions of Paragraph 28 of the EBA LG.
The Bank of Italy's clarifications, recalling Paragraph 18 of the EBA LG, confirm that it is possible to take account of any extension periods provided for by law in favor of the public administration, including any moratoria provided for by law.
II. Secondly, for the purposes of applying the definition of default, the aforementioned clarifications of Bank of Italy specify that:
(i) the Ministries must be considered as a single central government debtor in view of the public accounting rules from which the unity of the State budget and assets derives (and, therefore, the unity of the debt position of these entities);
(ii) public debt securities held by the bank (or banking group) in the banking book must be included in the total amount of their exposures for the purposes of calculating the materiality threshold (“relative”[9] and “absolute”[10]) according to the rules of the new definition of default.
The clarifications provided by the Italian Supervisory Authority make it possible to mitigate the impact of the new definition of default on financial intermediaries’ exposures towards public administrations. The possibility to include also public debt securities in the calculation of the relevance threshold results, in fact, in a greater overall exposure to the central government, implicitly reducing the value of the so-called relative threshold.
This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For further information please contact Matteo Gallanti.
[1] For an overview of the issue and a summary of the regulatory framework, see our previous alert: https://www.nctm.it/en/news/articles/the-new-definition-of-default.
[2]https://www.bancaditalia.it/compiti/vigilanza/normativa/archivio-norme/circolari/c285/Nota-chiarimenti-15-febbraio-2021.pdf.
[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018R0171&from=GA
[4] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32013R0575&from=EN
[5]https://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
[6] See Paragraph 16 EBA LG.
[7] Institutions may apply specific treatment for exposures to central governments, local authorities and public sector entities where all of the following conditions are met: (a) the contract is related to the supply of goods or services, where the administrative procedures require certain controls related to the execution of the contract before the payment can be made; this applies in particular to factoring exposures or similar types of arrangements but does not apply to instruments such as bonds; (b) apart from the delay in payment no other indications of unlikeliness to pay as specified in accordance with Article 178(1)(a) and 178(3) of CRR and these guidelines apply, the financial situation of the obligor is sound and there are no reasonable concerns that the obligation might not be paid in full, including any overdue interest where relevant; (c) the obligation is past due not longer than 180 days. Institutions that decide to apply the specific treatment referred to in paragraph above should apply all of the following: (a) these exposures should not be included in the calculation of the materiality threshold for other exposures to this obligor; (b) they should not be considered as defaults in the sense of Article 178 of CRR; (c) they should be clearly documented as exposures subject to the specific treatment (See Paragraphs 25 and 26 EBA LG).
[8] For example, for receivables included in the scope of application of Legislative Decree no. 231 of 9 October 2002, as amended by Legislative Decree no. 192 of 9 November 2012 (Legislative Decree 231/2002), the due date of the individual payments is calculated - in addition to the provisions of the source (contractual, legal or regulatory) of the receivable - taking into account the provisions of article 4 of the aforementioned decree.
[9] The threshold is represented by the amount equal to 1% of the aggregate exposures of the debtor vis-à-vis credit and financial intermediaries belonging to the same prudential consolidation perimeter.
[10] The materiality threshold is set at € 100 for retail exposures (small-medium enterprises and individuals) and € 500 for other exposures.
