What is the reading of the term "material" exposure in connection with "days past-due" for the purpose of definition of non-performing exposure?

Can the "materiality threshold" be applied in a way that the counting of days past due starts when the past-due amount of the whole exposure of the obligor exceeds pre-defined materiality threshold?

In accordance with Article 178(1)(b) of Regulation (EU) No 575/2013 (CRR), a default shall be considered to have occurred if the obligor is past due more than 90 (or 180 where applicable for exposures secured by residential property or SME commercial immovable property in the retail exposure class, as well as exposures to public sector entities) days on any material credit obligation to the institution, the parent undertaking or any of its subsidiaries. In the case of retail exposures, institutions may apply the past-due criterion at the level of an individual credit facility rather than in relation to the total obligations of a borrower. For the purposes of this subparagraph, Article 178(2)(d) CRR provides that the materiality of a credit obligation past due shall be assessed against a threshold, defined by the competent authorities.

The conditions according to which a competent authority shall set the threshold referred to in paragraph 2(d) have been further specified in Commission Delegated Regulation (EU) 2018/171 (RTS on materiality threshold for credit obligations past due), which specifies in particular that competent authorities shall set a materiality threshold that is composed of both an absolute and a relative component.  The assessment of the materiality refers to the past due part of the exposure and not to the total exposure and for the purpose of recognition of default the counting of the 90 (or 180) days shall start only once the past due amount becomes material. If the past due part of exposure continues to be material for 90 (or 180) consecutive days, a default shall then be considered to have occurred.  

According to Article 6 of this RTS, a competent authority shall set a date for the application of the materiality threshold, which may vary for different categories of institutions, but which shall be no later than 31 December 2020 for institutions using the Standardised Approach.

Additionally, Part 2, Paragraph 213 of Implementing Regulation (EU) No 680/2014,  as amended by the Commission Implementing Regulation (EU) No. 2017/1443 (which updates the Commission Implementing Regulation (EU) 2015/227 - ITS on definitions for forbearance and non-performing exposures) provides that material exposures which are more than 90 days past-due shall be considered non-performing exposures. This should be read together with Paragraph 216, which clarifies that materiality shall be assessed in accordance with Article 178 CRR. Hence the conditions specified in the RTS on materiality threshold for credit obligations past due apply also for the purpose of reporting of non-performing exposures.

Further to this, Part 2, Paragraph 222 of ITS No 680/2014 (as amended) states that an exposure is “past-due” when it meets the criteria of Paragraph 96, that is where any amount of principal, interest or fee has not been paid at the date it was due. Paragraph 96 follows clarifying that past due exposures shall be reported for their entire carrying amount and broken down according to the number of days of the oldest past due amount unpaid at the reference date.

It follows that there are two different assessments of past due days, i.e.:

• of material exposures past due days, whose count starts after the threshold according to Article 178 (2)(d) CRR and Regulation 2018/171 has been breached; and
• of past due days where any amount has not been paid at the date it was due, whose count starts on the first day after the date it was due, regardless of the materiality threshold.

For the purpose of classification of exposures as non-performing, the assessment refers to material past due exposures and hence the counting of 90 days should commence once the past due amount, being the sum of past due principal, interest and fees, breaches the materiality threshold. If the past due part of exposure continues to be material for 90 consecutive days, the exposure should then be classified as non-performing.

On the other hand, non-performing and performing exposures are reported in templates F 18.00 and F 19.00 of Annexes III, IV and V of Implementing Regulation (EU) No 680/2014. For this purpose, Part 2, Paragraph 235 of Implementing Regulation (EU) No 680/2014 (as amended) clarifies that past due exposures shall be reported separately within the performing and non-performing categories for their entire amount as defined in Paragraph 96 and that exposures past due by more than 90 days but that are not material in accordance with Article 178 of CRR – i.e.  - shall be reported within performing exposures in “Past due > 30 days <= 90 days”.

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.