Can uncommitted guarantee/letter of credit lines be classified as low risk under Annex I, point 4 letter (c) CRR?
According to Article 111 of the CRR, CCF 0% is assigned for low-risk items specified in Annex 1 of the CRR. The following off-balance sheet items can be classified as low risk: “(a) undrawn credit facilities comprising agreements to lend, purchase securities, provide guarantees or acceptance facilities which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness. Retail credit lines may be considered as unconditionally cancellable if the terms permit the institution to cancel them to the full extent allowable under consumer protection and related legislation; (b) undrawn credit facilities for tender and performance guarantees which may be cancelled unconditionally at any time without notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness; and (c) other items also carrying low risk and as communicated to EBA”.
In our view uncommitted lines are not the same as credit facilities for which the bank can effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness.
Thus, our question refers to cases where the bank does not need to have any evidence to refuse at any time to issue guarantee / letter of credit to customer. Secondly as this is an uncommitted liability, the customer always has to ask Bank to issue guarantees / letters of credits, it would not be automatic, upon request of the customer.
An uncommitted item is not in itself automatically associated to the low risk items category in Annex I of the CRR, as this would depend in the first place on whether it qualifies as an off-balance sheet item and secondly on the characteristic of the exposure.
With specific regard to the classification under Annex I of CRR, only items that constitute an exposure within the meaning of Article 5(1) of the CRR are considered.
As an illustration, framework arrangements would not give rise to off-balance sheet items if the institution needs not only to approve the initial and each subsequent drawdown by the client but it has also the complete discretion on whether to give its approval regardless of the fulfilment by the client of the conditions set out in the arrangement, since no drawdown would be possible without a prior and specific approval of the institution. On the other hand, cases where the institution receives fees or commissions to establish or maintain the arrangements or it does not assess the creditworthiness of the client prior to each drawdown could be examples of arrangements giving rise to off-balance sheet exposures.
In this sense, any arrangement that allows the client to draw on the credit facility without the institution’s approval on an individual basis constitutes an off-balance sheet exposure and the fact that these arrangements can be cancelled at any time by the institution without prior notice is relevant for their categorisation as a low risk item.
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.