The Bank of Italy has published a note reviewing European Union rules for classifying loans as in default and supervisory findings from their application. Incorrect classification can understate credit losses, distort capital calculations and lead to failures in applying minimum coverage requirements. The note also outlines the corrective measures required when supervision identifies deficiencies.
The framework has applied to exposures to all counterparties since Jan. 1, 2021. Default generally arises when arrears exceed materiality thresholds for more than 90 consecutive days, or when a bank considers full repayment unlikely without recourse to measures such as enforcing collateral. The latter condition can apply even without overdue payments. As background, a May 2026 update to European Banking Authority guidelines revised the circumstances in which certain payment delays in factoring without recourse can qualify as technical arrears.
Over the past five years, supervisory checks and inspections have identified errors in counting days past due, inconsistencies between performing classifications and the charging of default interest, and deficiencies in accounting for and recovering that interest. Misclassification can also affect the EU calendar approach, under which minimum supervisory coverage increases with the time elapsed since classification as nonperforming and takes collateral into account. Where irregularities affect loan classification or regulatory capital, intermediaries must correct the deficiencies, with supervisors checking the effectiveness of remediation. Measures are proportionate to the nature and severity of the problems and may include early intervention where legal conditions are met.