Question ID
2014_1263
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
166
Paragraph
10
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
Not applicable
Name of institution / submitter
Association of German Banks
Country of incorporation / residence
Germany
Type of submitter
Industry association
Subject matter
Use of an insitution's own estimates of conversion factors
Question

In applying Article 166(10) of Regulation (EU) No 575/2013 (CRR), may competent authorities grant permission to institutions to use their own estimates of conversion factors (as is permitted for certain exposures under Articles 151(7) and (9)) for off-balance sheet exposures which are not listed under Article 166(8)?

Background on the question

Based on Article 151(7) in conjunction with Article 151(9) of the CRR, the own conversion factor estimates can be used for off-balance sheet exposures which are assigned to the IRBA exposure classes 'central governments / central banks', 'institutions', 'corporates' and 'retail' if the bank has the permission to do so, i.e. in our view, there is no restriction to certain product types. While Article 166(8) of the CRR includes this clarification that own estimates may be used, this clarification is missing in Article 166(10) of the CRR. Therefore, it is not clear whether an institution can receive the permission to use own estimates of conversion factors for off-balance sheet exposures not mentioned in Article 166(8)(a) to (d) of the CRR.

Submission date
Final publishing date
Final answer

Article 151(8) of Regulation (EU) No 575/2013 (CRR) states that the conversion factors specified in Article 166(8) should be applied to those exposures belonging to the exposure classes referred to in Article 147(2)(a) to (c), unless the institution has been permitted to use its own estimates of conversion factors in accordance with Article 151(9).

According to Article 151(9) of the CRR, a competent authority can permit institutions to use own estimates of conversion factors for exposures belonging to the exposure classes 'central government and central banks', 'institutions', and 'corporates' as listed in Article 147(2)(a) to (c). Institutions using the IRB approach must also use own estimates of conversion factors for exposures belonging to the retail exposure class according to Article 151(7) of the CRR.

A conversion factor is defined in Article 4(56) of the CRR as "the ratio of the currently undrawn amount of a commitment that could be drawn and that would therefore be outstanding at default to the currently undrawn amount of the commitment, the extent of the commitment being determined by the advised limit, unless the unadvised limit is higher". This definition makes it clear that the notion of a conversion factor is only relevant for certain types of exposures, and not for all off-balance sheet exposures. This is supported by the fact that the CRR does not provide for a competent authority to permit institutions to use their own estimates of LGDs and conversion factors for any other exposure class other than those explicitly referred to in points (a) to (c) of Article 147(2) of the CRR.

The treatment of off balance sheet items other than those mentioned in paragraphs (1) to (8) of Article 166 of the CRR is specified in Article 166(10), which also applies to all IRB banks. According to this paragraph, the exposure value shall be a percentage of its value, based on the classification of off-balance sheet items established in Annex I. This provision makes no reference to the notion of 'conversion factors', simply referring to the use of a pre-determined 'percentage of its value', leaving no scope for own estimation.

Accordingly, an institution's own estimates of conversion factors can only be used for the items listed in Article 166(8) of the 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.

Disclaimer

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