Institutions applying the Definition of Default for retail exposures at facility level may have portfolios where a significant share of exposures are granted as joint credit obligations to two or more obligors.

The EBA Guidelines define a joint credit obligation as an exposure to two or more obligors that are equally responsible for repayment (paragraph 96) and clarify that a joint obligor (i.e. a specific set of individual obligors) should be treated as a different obligor from each of the individual obligors (paragraph 104). While the Guidelines provide explicit guidance on joint credit obligations, this guidance is articulated in the context of default assessment at obligor level. Where default is operationally assigned at facility level, the application of these principles is not explicit.

In addition, the Guidelines describe several possible contagion (spreading) and pulling effects of default, including the application of the concept of a “significant part” of exposures being in default (paragraphs 59(g) and 94, often operationalised via a 20% threshold based on paragraph 227 of Annex V of Regulation (EU) No 2021/451).

In practice, questions arise as to how these principles should be consistently operationalised where:

• default is assigned at facility level (rather than obligor level), and

• exposures include joint credit obligations.

In particular, clarification is sought on how to define the relevant “obligor unit” for the purposes of contagion and the 20% threshold, and how to apply the contagion logic consistently for joint obligors.