Question ID:
2016_2663
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:
n/a
Disclose name of institution / entity:
Yes
Name of institution / submitter:
ECB
Country of incorporation / residence:
Germany
Type of submitter:
Competent authority
Subject Matter:
Meaning of "credit lines" in the context of conversion factors for certain off-balance sheet items
Question:

Which types of off-balance sheet exposures are referred to by the term “other credit lines” in Article 166(8)(d) CRR? Specific clarification is requested (i) for long-term letters of credit arising from the movement of goods, as only such short-term letters are mentioned in Article 166 (8)(b) CRR, and (ii) for guarantees.

Background on the question:

Obviously the term “other credit lines” in Article 166(8)(d) CRR cannot refer to all other off-balance sheet items not explicitly mentioned in paragraphs 1 to 8 of Article 166 CRR – otherwise paragraph 10 of Article 166 CRR would specify percentages for an empty set of off-balance sheet items which is certainly not the case. This means that for each of the categories “high risk” / “medium risk” / “medium/low risk” / “low risk” in paragraph 10 of Article 166 CRR, some of the off-balance assigned to the respective category by Annex I CRR do not fall under “other credit lines”. Since in particular the following items are not explicitly mentioned in paragraphs 1 to 8 of Article 166 CRR, this raises the question whether they are covered by the term “other credit lines”:

(1) guarantees having the character of credit substitutes, (e.g. guarantees for the good payment of credit facilities);

(2) long-term letters of credit arising from the movement of goods.
Q&A 2014_1263 has clarified that an institution's own estimates of conversion factors can only be used for the items listed in Article 166(8) of the CRR. This restriction might be explained by the issue that own estimates for such off-balance sheet items for which drawings additionally depend on a certain specified event, would require additionally modelling the likeliness of these events rather than solely the additionally drawn amount that would be outstanding at default. This could cause the following issues:

(a) Where such events are not credit events, this could require modelling of non-credit-risk events.

(b) Where such events are credit events, this could result in unjustified double recognition of the likeliness of defaults and losses. The likeliness of a default of the obligor of the guaranteed exposure and the percentage ultimately drawn on the guarantee is already reflected by PD and LGD. Thus, this cannot be again reflected by reducing the exposure value by a conversion factor less than 100%, which explains why in particular guarantees having the character of credit substitutes are assigned by Annex I CRR to the “high risk” category for which a conversion factor of 100% applies, according to Article 166(10) CRR.

Date of submission:
07/03/2016
Published as Final Q&A:
20/01/2017
EBA Answer:

Article 166 CRR entails provisions for the calculation of the exposure value of balance and off balance sheet items. More specifically, Article 166(8) CRR provides for the determination of the exposure value of the amounts “committed but undrawn” for the items listed in letters (a) to (d) of that paragraph.

When a “credit line” (or a note issuance facility or a revolving underwriting facility) cannot be subsumed under one of the more specific definitions in letters (a), (b) or (c), it shall be treated under letter (d). In this context “other credit lines” will entail all credit lines other than unconditionally cancellable credit lines described under letter (a).

Where an off balance sheet item cannot be subsumed under letters (a) to (d), it shall be treated under Art 166(10) CRR.

Since neither (long term) letters of credit nor guarantees for the good payment of credit facilities can be considered a “credit line” and they are not mentioned elsewhere in Article 166 (8) letters (a) to (d) CRR, these items should be treated in accordance with Article 166 (10) CRR.

Status:
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

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.

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