Response to consultation on Guidelines on the application of the definition of default
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• Bonis
• esposizioni scadute sconfinanti deteriorate
• inadempienze probabili e sofferenze.
Forborne classification cuts accross the above mentioned classification.
The applied probation period varies depending on the classification of positions:
• Bonis: 24 months (probation period)
• Impaired loans 12 months (cure period), to which 24 months of the probation period are added once the position reverts to bonis status.
• Unlikeliness to pay, indicatively 12 months (cure period), after that the position is assessed and a further observation period, determined time to time, is eventually added.
Anyway, we consider that in some cases, due to the variable economic situation, resilience of job market etc, it should be appropriate to adopt a more flexible method of classification, in order to avoid the restriction of impaired loans, resulting from it an improvement of the financial istitution credit portfolio.
• rating (single number of registry/NDG)
• technical form
• guarantees
• legal form.
1. Do you agree with the proposed definition of technical defaults? Do you believe that other situations should be included in this definition? If yes, please provide detailed proposals on how to address further possible situations.
1) In addition to the situations of technical default" under paragraph 20, we think that it could be appropriate to consider as technical defaults also those positions that were reported as expired due to bureaucratic delays of various types (for example timing to formalize the resolutions, availability of notaries, time required for the registration of mortgages). There delays are not directly attributable to the customer."3. Do you agree with the approach proposed for the treatment of specific credit risk adjustments?
Yes, we agree. Cassa Padana operations fit with the approach proposed.4. Do you consider the proposed treatment of the sale of credit obligations appropriate for the purpose of identification of default?
We agree with the trends described for the identification of default, on the basis of the results obtained in the scope of sale of credit obligations. Nevertheless, we point out that our bank proceeded to sell credit obligations (in a massive way) in only two occasions, and we sold credit obligations already classified as default. For that reason, the percentage recovered on the amount of the credit was less than 5%.5. Do you agree that expected cash flows before and after distressed restructuring should be discounted with the customer’s original effective interest rate or would you prefer to use the effective interest rate applicable at the moment before signing the restructuring arrangement? Do you consider the specification of the interest rate used for discounting of cash flows sufficiently clear?
In the scope of restructuring arrangement, also where different financial institutions are involved, the interest rate applied on loans tries to meet the ability of payment that the bank expests from the client. The ability of payment emerges from a business plan structured by professionals chosen by the banks or agreed with the banks. In several cases of restructuring arrangement, the main objective is to support business activity and, of course, recover the capital.6. Do you agree that the purchase or origination of a financial asset at a material discount should be treated as an indication of unlikeliness to pay?
We agree with the indications, but we want to point out that unlikeliness to pay is not evident whereas the “discount” on the value of the financial asset comes from an operation of discounting back of it, hence it is not attributable to an impairment of the credit obligation.7. What probation periods before the return from default to non-defaulted status would you consider appropriate for different exposure classes and for distressed restructuring and all other indications of default?
The rules issued by Bank of Italy, in order to adopt new EU provisions as of forbearance meausures, considers the following classification of credits:• Bonis
• esposizioni scadute sconfinanti deteriorate
• inadempienze probabili e sofferenze.
Forborne classification cuts accross the above mentioned classification.
The applied probation period varies depending on the classification of positions:
• Bonis: 24 months (probation period)
• Impaired loans 12 months (cure period), to which 24 months of the probation period are added once the position reverts to bonis status.
• Unlikeliness to pay, indicatively 12 months (cure period), after that the position is assessed and a further observation period, determined time to time, is eventually added.
Anyway, we consider that in some cases, due to the variable economic situation, resilience of job market etc, it should be appropriate to adopt a more flexible method of classification, in order to avoid the restriction of impaired loans, resulting from it an improvement of the financial istitution credit portfolio.
8. Do you agree with the proposed approach as regards the level of application of the definition of default for retail exposures?
Our Institution does not apply the credit classification per individual credit facility. The default classification refers to all credit obligations together in the hands of a single legal entity, either retail or not. The only case of classification on an individual credit facility refers to the applicatio of PDs on credit in status of bonis. We apply a mechanism called “collective devaluations” processing statistics that take into account:• rating (single number of registry/NDG)
• technical form
• guarantees
• legal form.