Credit Conversion Factor

Bank supervision - capital adequacy.

(CCF).

The CCF converts an off balance sheet exposure to its credit exposure (Risk Weighted Assets) equivalent.

Off balance sheet exposures - like a guarantee - have a probability of becoming a credit exposure and shifting onto the balance sheet, for example if the guarantee is called.

The CCF is an estimate of this probability.

By multiplying the CCF with the value of the guarantee or other off balance sheet exposure, you get the expected value of the credit exposure.

Sometimes abbreviated to conversion factor.

What is changing?

"One key change which will impact corporates is the conversion factor (CF) associated with performance guarantees (incl. bid bond, advance, performance & retention guarantees).

The proposal is to increase this from 20% CF to 50% CF.

The CF defines the probability that a contingent liability exposure (such as a performance guarantee) will convert to an on balance sheet obligation for the bank when a claim is made by the beneficiary and the obligor fails to make payment under the guarantee.

The capital that the bank is required to keep for performance guarantees is linearly proportional to the CF and it is likely that banks will need to pass on this additional capital charge.

For example, for a corporate with an external S&P rating of ‘A’, if the existing pricing for such a performance guarantee was 0.4%, this would increase to 1%."

Naresh Aggarwal, Associate Director, Policy & Technical, ACT - February 2023.

See also

• Bank supervision
• Basel 3.1
• Beneficiary
• Bid bond
• Capital
• Capital adequacy
• Contingent liabilities
• Contingent risk
• Corporate
• Credit
• Credit rating
• Guarantee
• Obligor
• Off balance sheet risk
• Performance guarantee
• Prudential Regulation Authority
• Retention bond
• Risk Weighted Assets (RWAs)
• Standard & Poor's (S&P)