How to estimate CCF? Flooring of realised CCF at exposure level or flooring of the final CCF parameter?
It is commonly agreed that CCF parameter (Credit Conversion Factor, as referred to in Article 182 CRR2) used in AIRB approach should not be less than zero. However, there are often revolving facilities with exposure amount decreasing before default event. In such cases the 'raw' value of realised CCF would be negative.
There are at least two ways of dealing with that issue. We can floor the realised CCF to zero at exposure level or we can floor at zero the final parameter calculated as average of realised CCFs (in case the average is negative).
Let's take example with two exposures with realised CCF equal to 100% and -300%: the first approach gives 50% (average of 100% and 0%), the second approach gives 0% (after flooring the value of -100%, i.e. the average of 100% and -300%). The difference might be significant and can directly influence the EAD and RWA calculation.
It is unclear which one of those two approaches would be preferable and whether there are any reservations about usage of the second approach (flooring to zero at the level of the final CCF parameter) taking into account regulatory framework.
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