Handling Changing Credit Limits in Credit Conversion Factor Estimates

Summary

The document raises a modeling question about estimating product-level credit conversion factors (CCFs) when borrowers’ credit limits change between the observation date and default. It notes that regulatory guidance from the FCA is understood to recommend excluding such accounts, while the author has not found the same rule in the IRB approach or CRR guidance.

The concern is that limit changes can produce unusually large CCF estimates, sometimes above one, and the author asks whether these should be trimmed and how to do so systematically in European banking. The document offers no answer, method, empirical evidence, or regulatory interpretation. It is useful chiefly for identifying a data-treatment and regulatory-interpretation problem; its proposed trimming is tentative, and the appropriate handling remains unresolved.

Key ideas

• Changing credit limits between observation and default can affect product-level CCF estimates.
• The author reports a perceived FCA exclusion recommendation but finds no equivalent rule in the IRB approach or CRR guidance.
• Limit changes may create extreme CCF observations, including values above one.
• The document asks whether and how such observations should be excluded or trimmed, but provides no resolution.

Tags

# Credit Conversion Factor with changing credit limits


# Credit Conversion Factor with changing credit limits












What is your go to approach when calculating the CCF at the product level, when accounts withing the products have changing credit limits from the point of observation to the point of default.

The FCA writes that such accounts should be excluded. But I find nothing of that kind either in the IRB-Approach nor in the CRR guidelines.

Since those accounts can become signficant outliers, with CCF Values often massively bigger than 1, it would seem logical to do some trimming. But i can not find a systematic approach to handle those outliers nor are there any solid guidelines available.

Do you guys have any recommendations (that are applicable in european banking)?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.