Definition of Default (CRR Article 178) – Application of contagion and the 20% “significant part” threshold in the presence of joint credit obligations where default is applied at facility level

When the Definition of Default for retail exposures is applied at facility level, how should institutions apply the contagion and pulling effects set out in Article 178 CRR and EBA/GL/2016/07 in the presence of joint credit obligations, given that paragraphs 96–99 are articulated for obligor level default, while Article 178 CRR allows default recognition at facility level. In particular: Should a joint obligor (i.e. a specific set of obligors jointly liable) be treated as a separate obligor for the purposes of assessing contagion and the “significant part” (20%) threshold? How should contagion be assessed between:  joint credit obligations of the same set of obligors, individual exposures of the obligors participating in the joint obligation, and other joint credit obligations of those individual obligors with different counterparties, where default is recognised at facility level (including defaults identified through indications of unlikeliness to pay)? How should this be applied in practice for the 3 illustrative examples given?

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.