According to Article 178(2)(d) of the CRR, competent authorities are 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. The competent authorities must also take into account the Commission Delegated Regulation (EU) No 2018/171, which represents the Regulatory technical standards about which we informed in a separate article.
The European Central Bank (ECB) is the competent authority to define materiality threshold for significant institutions within the Single Supervisory Mechanism (SSM) which makes one of the important pillars of the Banking Union.
On the 3rd July 2018 the ECB published a draft ECB Regulation on the definition of the materiality threshold for credit obligations past due for public consultation until 17 August 2018. The ECB is going to define the absolute and relative components of the materiality threshold in line with Article 178(2)(d) of the CRR and Articles 1, 2 and 3 of the Commission Delegated Regulation (EU) No 2018/171, i.e.:
It can be compared with the approach of the Czech National Bank about which we already informed and which also follows the Commission Delegated Regulation.
The ECB informs that different practices apply across the euro area. In some countries, the competent authorities have set materiality thresholds that must be applied by institutions. In other countries, the competent authorities have set materiality thresholds, but institutions have some flexibility to apply different thresholds. In the remaining countries, the choice of the materiality threshold to be applied is left entirely to institutions.
The ECB expects that if materiality threshold is set below the current level of the national threshold, the number of defaulted exposures is likely to increase in the short term. Nevertheless, it is expected that institutions that currently apply a higher threshold will also adjust their credit risk management processes, thus reducing the impact on the number of defaults in the medium to long term. Thus the final effect of a change of the materiality threshold on the number of defaults will not be straightforward as it is determined not only by the level of the threshold, but also by its structure, as well as by the interplay with the unlikeliness-to-pay criterion.
After the completion of the public consultation, the ECB published its Regulation on the materiality threshold for credit obligations past due on the 26th November 2018. The Regulation sticks to the materiality thresholds, both the absolute and relative ones, presented in the draft Regulation published in July 2018. In addition, the Regulation sets that credit institutions shall notify the ECB, before 1st June 2019, about the exact date on which they will start applying the thresholds.