Question ID:
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Credit risk
111, Annex 1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Disclose name of institution / entity:
Type of submitter:
Credit institution
Subject Matter:
Correct application of credit conversion factors in relation to credit substitutes and shipping guarantees

According to Annex I Classification of off-balance sheet items:
a) Paragraph 1. (a) guarantees having the character of credit substitutes are guarantees for the good payment of credit facilities. These guarantees bear full risk, therefore CCF of 100% is applied as stated in Article 111. Could you provide more examples or a definition of credit substitutes?
b) Paragraph 2. (b). (i) shipping guarantees: could guarantees for payment of delivered goods and services be considered shipping guarantees?

Background on the question:

With reference to Article 111 & Annex I providing example of credit substitute and term shipping guarantee: guarantees for payment of delivered goods and services are considered to be: a) shipping guarantees (medium risk item - CCF 50%) or b) guarantees having the character of credit substitutes (full risk item – CCF 100%).

Date of submission:
Published as Final Q&A:
Final Answer:

The classification of a ‘guarantee for payment of delivered goods and services’ according to Annex 1 depends on the characteristics of the guarantee itself.

Annex I paragraph (1) of the CRR mentions that guarantees having the character of "credit substitutes" belong to the "full risk" category. An example of those kinds of guarantees is also given in the Annex: guarantees for the good payment of credit facilities. It can be deducted from that example that some of the features of a credit substitute are that it is an off-balance sheet obligation and that it carries substantively the same credit risk as a drawn direct credit facility.

In contrast, the term “shipping guarantee” refers to off-balance sheet liabilities such as those that allow a customer to take possession of shipped goods before the shipping company receives the title documents (e.g. the bill of lading), indemnifying the shipping company from losses in case the customer has no valid title on the shipped goods.

If the “guarantee for payment of delivered goods and services” cannot be classified neither as a "credit substitute" nor as a "shipping guarantee", then it could be analysed whether it meets the trade finance definition in Article 4(1)(80) CRR, as trade finance off balance sheet items are classified as medium or medium/low risk. If it is not the case, they should be treated under “Other items carrying [full, medium, medium/low, low risk as appropriate]” and, where applicable, “as communicated to EBA”.

See also Q&A 2198.

Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.