Are observed defaults of credit facilities that are fully-drawn at reference date in scope for estimation of own-conversion factors?
Article CRR 182 (1) (a) states that “all observed defaults within the data sources” are to be used in the estimation of own-conversion factors (hereafter CCFs).
However, in the case of observed defaults of credit facilities that were fully-drawn at reference date, the realised CCF as defined in CRR 4(1)(56) cannot be calculated. This is because the denominator of the realised CCF, namely the “currently undrawn amount of the commitment”, is zero. Similarly during model application, the entire exposure of a fully-drawn credit facility is on-balance, and there is no “committed but undrawn amount” on which a CCF could be applied as per CRR 166(8).
At the same time, leaving defaults of fully-drawn credit facilities outside the scope of CCF model estimation could result in 'missed' additional drawings. This is because these facilities can still exhibit additional drawings in the lead-up to the default event. This can happen for a variety of reasons, for example due to the accrual of interest arrears and fees, or due to a limit increase between reference and default date.
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