Default rules cover unlikely repayment and overdue debt
Bank of Italy explains how European default rules identify impaired loans and affect banks' capital calculations. Misclassification can understate losses, distort risk-weighted assets and undermine minimum coverage requirements.
Default before missed payments
Article 178 of the Capital Requirements Regulation (CRR) implements the Basel definition of default in the European Union.
Default occurs when a bank judges full repayment unlikely without measures such as enforcing collateral, even if payments are current.
It also normally occurs when arrears exceed materiality thresholds for more than 90 consecutive days.
European Banking Authority (EBA) guidelines specify day counting, unlikely-to-pay criteria and exit conditions.
Bank of Italy incorporated them into its supervisory rules; the framework has applied to all counterparties since January 1, 2021.
European calendar provisioning rules require minimum coverage that rises with time since impaired classification and takes collateral into account.
Clarifications, not new rules
Bank of Italy issued clarifications in August 2020, updated in October 2020, 2021 and 2022.
These facilitate application rather than introduce rules or broaden European requirements.
They cover IFRS 9 portfolios, non-recourse factoring, public-sector exposures, disputes suspending day counts, joint obligations and salary-backed loans.
A May 2026 EBA update revises when non-recourse factoring delays qualify as technical arrears.
Over five years, off-site checks and inspections found errors in day counts, performing classifications alongside late-interest charges and interest accounting and recovery.
Classification carries capital consequences
Default classification affects both loss recognition and regulatory capital.
Bank of Italy requires banks to correct classification and capital deficiencies and checks whether remedies work.
Supervisory measures reflect the nature and severity of deficiencies and can include early intervention where legal conditions are met.