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    Bank of Italy on Capital Distribution Policy and Definition of Default

    December 28, 2020

    Bank of Italy has recommended the less significant banks under its supervision to refrain from, or limiting, dividend payouts until September 30, 2021; the recommended limit for dividend payouts is no more than 15% of the accumulated profit for the financial years 2019 and 2020, or no more than 20 basis points in terms of the common equity tier 1 ratio, whichever is lower. Bank of Italy also recommended banks to refrain from deciding on or paying out provisional dividends in relation to profit for 2021 and to exercise extreme prudence in calculating variable remuneration. This is in line with the ECB recommendation on dividend distribution during COVID-19 pandemic. In addition, Bank of Italy announced that the new definition of default provided for by the European regulation on prudential requirements for credit institutions and investment firms (refers to the Capital Requirements Regulation) will enter into force from January 01, 2021.

    The definition of default concerns the way in which individual banks and financial intermediaries must classify clients for prudential purposes—that is for calculating the mandatory minimum capital requirements for banks and financial intermediaries. The new definition of default does not substantially change the reports to the Central Credit Register, used by intermediaries in the process of assessing the "creditworthiness" of customers. The new definition of default may have repercussions on credit relationships between intermediaries and their customers, whose management, as in all situations of default, may involve the adoption of initiatives to ensure the regularization of the credit relationship. According to the new definition, a default shall be deemed to have occurred when the amount of the arrears exceeds both the following limits for more than 90 consecutive days:

    • EUR 100 for retail exposures and EUR 500 for exposures other than retail (absolute threshold)
    • 1% of the overall exposure to a counterparty (relative threshold)

     

    Related Links (in English and Italian)

    Keywords: Europe, Italy, Banking, CRR, COVID-19, Dividend Distribution, Definition of Default, Credit Risk, Regulatory Capital, Basel, ECB, Bank of Italy

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