Response to discussion on the simplification and assessment of the credit risk framework
Q15. Do you see other potential simplification areas where the modelling burden is not commensurate to the gain in risk sensitivity?
We agree with the Discussion Paper’s premise that regulatory design must balance risk‑sensitivity, simplicity, comparability and cost‑efficiency.
In particular, we very much align with the considerations of the EBA on risk- sensitiveness and simplicity as reflected in the DP, point 63: “…less risk sensitivity generally comes with higher conservatism. This can lead to an over-capitalisation, where the associated cost, such as hindering the financing of the real economy, may outweigh the potential benefits of enhanced financial stability. In addition, an increased risk sensitivity also ensures a more precise capital allocation, therefore bringing together risk management and regulatory metrics. Conversely, insufficient risk sensitivity can create incentives to invest in higher-risk assets, potentially undermining the intended prudence of the framework. Hence, simplification is not the sole goal for the regulatory framework”.
In our view, a clear area where risk‑sensitivity can be increased while reducing complexity concerns the prudential treatment of purchased trade receivables and factoring under the Standardised Approach to Credit Risk (SA‑CR).
Exposures to factoring and, in general purchased trade receivables, are characterised by a self‑liquidating nature, a direct link to underlying commercial transactions, and the widespread use of structural risk mitigation techniques (e.g. legal assignment of receivables, notification, concentration limits, insurance and credit protection mechanisms). Empirical evidence observed across jurisdictions points to loss dynamics and volatility patterns that differ materially from those of general corporate lending, especially for short‑tenor, granular portfolios.
Under SA‑CR, receivables‑based products are treated as unsecured lending, with insufficient recognition of (i) the short effective maturity (typically 60–90 days), (ii) historically high recovery rates, and (iii) the fact that purchased receivables represent both (a) a direct exposure to the accounting debtor (in non‑recourse structures) and (b) a risk‑mitigating asset supporting the advance to the assignor (in recourse structures).
By contrast, the CRR provides specific purchased‑receivables treatments under IRB, but market experience shows limited take‑up due to implementation complexity and data requirements (including the scarcity of default events in factoring portfolios), and the incentive to accept higher complexity is further weakened by the output floor, that penalizes in particular low-default portfolios, such as factoring and purchased receivables.
As a result, exposures to purchased receivables, under the current Credit Risk Framework, are treated less favourably than riskier options due to a combination of:
- the lack of recognition, under SA-CR, of the short-term and asset-based nature of trade receivables and of exposures secured by trade receivables;
- the high level of complexity and fragmentation of the specific approaches under the IRB framework, together with difficulties in building a sufficiently robust default database (in particular for specialised institutions) and reduced incentives to model as a consequence of the output floor.
Therefore, the European factoring industry proposes a pragmatic “substance over form” approach to increase the risk-sensitiveness of the Credit Risk Framework, by transposing the core risk‑sensitive principles already embedded (but rarely used) in the IRB purchased‑receivables framework into the SA‑CR.
To do so, the factoring industry identified two targeted and concrete proposals for a reform of the treatment of factoring under SA‑CR:
- Review risk weights for non‑recourse purchased receivables (exposure to buyers / accounting debtors).
Under SA‑CR, reassess the current RW applied to exposures to buyers where receivables are purchased without recourse, explicitly recognising the short effective maturity and historically high recovery rates of trade receivables, e.g. by providing a discounted RW for purchased corporate receivables with maturity up to 90 days.
EUF estimates based on EU‑wide data indicate that an appropriate risk weight for purchased receivables is, on average, 28% (top‑down approach; 90‑day maturity). A more conservative RW for unrated debtors could provide a balanced compromise while preserving the IRB premium.
- Allow a substitution approach for recourse factoring (exposure to clients / assignors).
Under SA‑CR, consider receivables purchased with recourse as valid collaterals for credit risk mitigation and allow factors to use (where beneficial) the buyer’s (accounting debtor’s) RW for exposures to clients in recourse purchases when operational control of cash inflows and strong security on receivables are demonstrably in place (such as the ones outlined in the CRR, art. 184, e.g. direct collection, controlled accounts, robust reconciliation…). This mirrors the IRB‑foundation logic (purchased receivables as eligible funded CRM) while remaining standardised and low‑complexity.
These adjustments would better align RWAs to observed loss behaviour, lowering capital absorption that is currently driven by formal past‑due triggers rather than by true default risk, thereby freeing up capacity to finance working capital for SMEs and strategic supply chains.
We believe that these adjustments are fully aligned with the objectives of the exercise to simplify the Credit Risk Framework, as they would: (i) reduce over-capitalisation; (ii) foster the financing of the real economy; (iii) ensure a more accurate allocation of capital, removing disincentives to investing in low-risk assets; and (iv) avoid increases in compliance costs and complexity.
Moreover, the ongoing mandate on purchased trade receivables could provide a timely opportunity (or, where considered more appropriate, this could be addressed through another suitable legislative or regulatory vehicle) to consider whether the SA‑CR treatment should better reflect the actual risk profile of receivables‑based finance while improving simplicity through clearer, principle‑based rules. The European factoring industry would be ready to actively support any work undertaken by the EBA on this issue through the provision of relevant evidence.
In addition, within the Credit Conversion Factor framework, the transitional measures for Unconditionally Cancellable Commitments (Art. 495d) should be made permanent (CCF for UCC at 0%), and the floor to realised conversion factors in AIRB estimation (Art. 182(1)) should be deleted, as it represents an unjustified constraint that decouples prudential parameters from actual risk and materially affects capital charges.
Q17. Do you agree with the approach proposed by EBA? Do you see further measures as necessary?
We broadly agree with the EBA’s approach to assess refinements through a structured balancing of risk‑sensitivity, simplicity and efficiency.
In this respect, trade receivables financing and factoring provide a concrete use case where the application of such criteria could support a more proportionate and risk‑aligned outcome, as outlined below.
A. Criticality of exposures
The EU factoring market has reached 2.5 trillion euros in 2025, according to preliminary figures. That translates into about 2 trillion of funds advanced by factoring companies through a revolving facility secured by the assignment of receivables. Although factoring is often considered as an alternative or complement to bank lending, the European industry is dominated by banks or financial companies that are part of banking groups with a market share of 90%. In many EU jurisdictions, factoring companies that are not banks are subject to prudential requirements similar to those of banks or via a bespoke framework. The EU factoring industry, given the size of the market and the prevalence of banks on the supply side, represents an area of excellence in comparison to the global peers, with Europe representing about two thirds of the global volumes.
According to the SAFE Survey (2025), factoring is widely used by EU firms (10% of them considers it a relevant source of finance), and is more popular among manufacturing, innovative, growing and exporting businesses, as it represents a flexible source of finance that automatically adapts to the growth of the sales, allows the business to lever on its buyers’ creditworthiness and provides safety to businesses entering new markets.
Factoring can serve well the working capital needs of businesses of any size: it is a perfect choice for the SMEs whose business are growing fast, for the SMEs with a strong client portfolio but struggling to provide traditional collaterals to borrow from banks and to corporates that wants to optimize their net working capital through the sale of receivables. In that perspective, factoring represents a core infrastructure for the EU real economy.
The factoring industry is well positioned to further support productivity, competitiveness and financial robustness within the EU in many ways, offering at the same time resources to accelerate on the ESG and digitalization agendas:
- thanks to factoring, SMEs can alleviate pressure on their working capital, thus becoming more competitive in international markets;
- supply chain leaders often resort to reverse factoring or similar products (i.e. supply chain finance) to strengthen their value chain and promote ESG transition vis-à-vis their suppliers;
- factoring and supply chain finance can boost SMEs digitalisation onboarding them on advanced digital platforms used to offer the services; interoperability of systems is more and more common in working capital finance and give a push to businesses to digitalise further.
Many providers of factoring services are specialized institutions.
B. Materiality of miscalibration
As stated in the reply to Q15, estimates point to a “proper” RW of 28% for factoring exposures across Europe. This materially differ from the 100% RW applicable to unrated corporates, which is currently applied to most clients and debtors in factoring transactions under SA-CR. The failure to consider the asset-based nature of factoring under SA-CR affects also IRB institutions, via the output floor, and capital allocation within banking groups.
C. Simplicity of the rules and transition costs
The factoring industry considers that the proposed adjustments to the rules would not lead to increased complexity or higher compliance costs. While being beneficial to both SA‑CR and IRB institutions, they would not require a redevelopment of internal models, as the enhanced risk sensitivity would be achieved through a recalibration of the output floor, which is directly linked to SA‑CR requirements.
D. Intrinsic consistency
The proposed changes are fully consistent with the IRB framework for purchased receivables, as they are based on the same core principles. Moreover, they would remove the current bias that makes factoring treated as unsecured lending, while being secured by the trade receivables, and ensure that riskier exposures are subject to higher own funds requirements via-à-vis factoring.
E. Extrinsic consistency
Factoring is a European excellence. According to FCI, 67% of the global turnover volumes are generated by European factoring companies.
Over time, factoring in Europe has developed its own distinctive approach, characterised by a strong focus on debtor selection, portfolio granularity and a holistic assessment of the transaction.
In recourse factoring, exposures are assessed as secured transactions, where the assignment of trade receivables plays a central role in the risk profile of the operation. In non‑recourse factoring, exposures display specific risk characteristics that are closely linked to the underlying commercial relationship and to the performance of the assigned receivables themselves.
This well‑established and risk‑conscious approach justifies a dedicated focus within the European regulatory framework, with a view to ensuring a level of risk sensitivity that more accurately reflects the actual risk profile and risk management practices of factoring.