Question ID
2022_6479
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Supervisory reporting - COREP (incl. IP Losses)
Article
430
Paragraph
1
Subparagraph
-
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Regulation (EU) 2021/451 – ITS on supervisory reporting of institutions
Article/Paragraph
-
Type of submitter
Credit institution
Subject matter
Credit conversion Factor (CCF) reporting
Question

Our concerns would apply to almost all IRB templates (i.e. COREP C 08.01). What would be the correct option?

Background on the question

We are reviewing our internal based risk (IRB) credit risk models. Our IRB analytic experts suggest that an additional CCF applied to on-balance-sheet exposures should be stated (CCF2 from now on) besides the "usual" credit conversion Factor (CCF) applied to off-balance-sheet exposures, in order to align IRB models to debtor actual behavior.

Exposure (EAD) = On-balance-Sheet * (1 + CCF2) + Off-balance-Sheet * (CCF) 

In terms of compliance with regulations, our risk teams would approach supervisory teams to validate this new CCF, but in terms of prudential reporting some questions arise. 

How should this new CCF2 be integrated in reporting? We are discussing about two different approaches, but we would like to check whether any of them is correct or if a different approach should apply:

  1. Embed the CCF2 in the current CCF, that is include the exposure from this CCF 2 in the "off-balance-sheet exposure".
  2. Include the CCF2 in the "on-balance-sheet exposure".

Option 1 would take this additional exposure as a "potential exposure" (as it really is), but bizarre effects would appear, if no "off-balance-sheet exposure" original exposure exists. Let us explain it with an example: If a credit card with a limit of 100 € is completely drawn (no off-balance sheet exposure) and a 1% CCF2 applies...

... the on-balance sheet metrics would be:

  • Original exposure 100€
  • Original Exposure pre conversion factors 100€
  • EAD 100€

... and the off-balance sheet metrics would be:

  • Original exposure 0€
  • Original Exposure pre conversion factors 0€
  • EAD 1€ (an implicit infinite CCF!!!)

On the other hand, option 2 would include the additional exposure to on-balance-sheet (the amount that is taken into account to calculate EAD), but on-balance EAD would be bigger than original exposure (in opposition to what Article 166(1) CRR states). Using the same example...

... the on-balance sheet metrics would be:

  • Original exposure: 100€
  • Original Exposure pre conversion factors: 100€
  • EAD: 101€

... and the off-balance sheet metrics would be:

  • Original exposure 0€
  • Original Exposure pre conversion factors 0€
  • EAD 0€
Submission date
Rejected publishing date
Rationale for rejection

 

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Status
Rejected question