ECB published Regulation (EU) 2018/1845 on the materiality threshold for credit obligations past due for all significant institutions within the Single Supervisory Mechanism (SSM); this threshold is for both retail and non-retail exposures, irrespective of the method used for the calculation of capital requirements. The regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
As per the regualtion, credit institutions shall assess the materiality of a credit obligation past due against the following threshold, which comprises two components:
- A limit in terms of the sum of all amounts past due owed by the obligor to the credit institution, the parent undertaking of that credit institution or any of its subsidiaries, equal to EUR 100 for retail exposures and EUR 500 for exposures other than retail exposures
- A limit in terms of the amount of the credit obligation past due in relation to the total amount of all on-balance sheet exposures to that obligor for the credit institution, the parent undertaking or any of its subsidiaries, excluding equity exposures, equal to 1%
In exercising options and discretions, ECB should take account of the general principles of Union law, in particular equal treatment, proportionality, and the legitimate expectations of supervised credit institutions. With regard to the legitimate expectations of supervised credit institutions, ECB acknowledges the need to allow for transitional periods where its exercise of discretions significantly departs from the approach taken by the national competent authorities prior to the entry into force of Regulation (EU) 2018/1845. In this respect, both credit institutions applying the standardized approach and the internal ratings-based approach should have an appropriate transitional period. Therefore, credit institutions must apply the threshold for the assessment of the materiality of a credit obligation past due set by Regulation (EU) 2018/1845 not later than December 31, 2020 and must notify ECB, before June 01, 2019, of the exact date on which they will commence applying such threshold.
Under Article 178(2)(d) of the Capital Requirements Regulation or CRR, ECB (as the competent authority) is required to define a threshold against which the materiality of a credit obligation past due will be assessed for the purpose of identifying defaults of obligors in relation to the obligors’ total obligations and at the level of individual credit facilities. By setting a single materiality threshold, the ECB Regulation fosters a harmonized definition of default within the SSM, thus improving the comparability of risk-weighted assets and defaulted exposures across significant institutions. In conjunction with EBA guidelines on the application of the definition of default, the ECB Regulation constitutes a major milestone in establishing a level playing field for the detection and treatment of obligors in financial difficulties.
Effective Date: December 16, 2018
Keywords: Europe, EU, Banking, CRR, Credit Risk, Materiality Threshold, Credit Obligations, Regulation 2018/1845, ECB
Previous ArticleEC Regulation Amends Certain Templates for Solvency II Reporting
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).