Question ID:
2019_5055
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Credit risk
Article:
166
Paragraph:
8
Subparagraph:
(d)
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
Not applicable
Disclose name of institution / entity:
Yes
Name of institution / submitter:
Association of German Banks
Country of incorporation / residence:
Germany
Type of submitter:
Industry association
Subject Matter:
Estimation of own CCFs for undrawn credit facilities which can be drawn in the form of guarantees.
Question:

Is a bank allowed to use its own CCF estimates for undrawn credit facilities which can be drawn in the form of guarantees?

Background on the question:

A bank provides a credit facility that is currently undrawn, but that can be drawn in the form of a guarantee, e.g. a Letter of Credit referencing the client,, which fall under Annex I point (2) (b) (ii)) of the CRR.
According to Article 166(8) third sentence institutions “[…] may use their own estimates of conversion factors across different product types as mentioned in points (a) to (d) […]” provided the requirements of section 6 are met and subject to permission of the competent authorities.
For products not mentioned in Article 166(8)(a) to (d), own CCF estimates must not be used. Article 166(8) consistently refers to credit lines (and not credit facilities), e.g. as per point (a) “for credit lines that are unconditionally cancellable at any time […]” and as per point (d) “for other credit lines […]”.

The CRR does not define the term “credit line”. As Article 168(8) does not use the term “credit facility” (the term typically used in Annex I), but “credit lines”, the question arises if these two terms are used synonymously.
As explained below, in our view, the two terms are used synonymously. Consequently, in our view own CCF estimates may be used for undrawn credit facilities, which can be drawn in the form of guarantees, provided the requirements of section 6 are met and subject to the permission (i.e. model approval) of the competent authorities.
In our view, the two terms are used synonymously for the following reasons:

1. Annex I of the CRR consistently (with one exception) refers to the term “credit facility”, e.g.
- Medium risk: undrawn credit facilities (agreements to lend, purchase securities, provide guarantees or accept facilities) with an original maturity of more than one year
- Medium/ low risk: undrawn credit facilities which comprise agreements to lend, purchase securities, provide guarantees or acceptance facilities with an original maturity of up to and including one year which may not be cancelled unconditionally at any time without notice or that do not effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness
- Low risk:
o 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
o 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.
The only exception is point (4) where in the context of “undrawn credit facilities” that can be cancelled unconditionally at any time, for Retail clients it is clarified that “credit lines” can be considered as unconditionally cancellable irrespective of consumer protection laws. Hence, also within Annex I the two terms are used synonymously.

2. The same question if the terms “credit line” and ”credit facility” are used synonymously also arises for undrawn credit facilities that can be drawn in the form of cash. Annex I refers to undrawn “credit facilities (agreements to lend […])” whereas Article 168 (8) refers to credit lines. Hence, if the terms “credit facility” and “credit line” had a different meaning, then banks would no longer be able to determine own CCF estimates for market standard products such as credit facilities that can be drawn in the form of cash. In our view, this is clearly not the intention of the CRR and is not aligned to how the predecessor directive 2006/48/EC (where the same question did arise) has been implemented nationally in Germany.

3. Our understanding that the two terms are used synonymously is consistent with Q&A 2663 which concerns the meaning of “other credit lines” in the context of conversion factors for certain off-balance sheet items. The EBA response clarifies that once a credit line has been drawn in the form of guarantee, the guarantee itself does not qualify as “other credit line”. Accordingly, the institution cannot make use of own CCF estimates for the guarantee itself. However, the EBA response distinguishes between the committed but undrawn credit line and the product which is drawn under the credit line (guarantee) and the response includes no statement that institutions are prohibited from using own CCF estimates for the committed but undrawn credit line.

Date of submission:
19/12/2019
Published as Rejected Q&A
11/02/2022
Rationale for rejection:

Please note that as part of adjustments to the Single Rulebook Q&A process, agreed by the EBA and the European Commission, it has been decided to reject outstanding questions submitted before 1 January 2020, when the Q&A process was updated as part of the last ESAs Review. In particular, the question that you have submitted has now regrettably been rejected and will not be addressed.

If you believe your question would still benefit from clarification, you are invited to resubmit your question, adapting it to reflect any legislative, regulatory or other relevant developments that may have occurred since the initial date of submission. The EBA will aim to address resubmitted questions as a matter of priority. When considering to resubmit, you are kindly requested to observe the updated admissibility criteria agreed in the context of the adjustment of the Q&A process, available in the Additional background and guidance for asking questions. We hope for your understanding.

For further information please refer to the press release and the updated Q&A page.

Status:
Rejected question
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