Two Credit Conversion Factor Conventions for Exposure at Default

Summary

This exchange explains how exposure at default can be expressed using a drawn balance, an undrawn facility amount, and a credit conversion factor. The question proposes adding the drawn amount to a fraction of the undrawn amount, illustrated with an overdraft example, and asks for a reference or possible correction. The response confirms that this is one valid formulation.

It also gives an alternative expression in which the factor multiplies the facility limit directly. Although both expressions use the term CCF, the response cautions that the factor is estimated differently for each formulation. It points to a paper on facilities with explicit limits as a reference. The short exchange clarifies a potentially important definitional distinction, but offers no derivation, regulatory citation, or detail on estimation methods, so readers should consult the cited research for implementation and context.

Key ideas

• One EAD convention adds drawn exposure to a CCF-weighted undrawn amount.
• Another convention applies a factor directly to the total facility limit.
• The factor's estimation depends on which EAD expression is being used.
• The response points to research on facilities with explicit limits for further reference.

Tags

# EAD = Drawn amount + Undrawn amount * CCF?


# EAD = Drawn amount + Undrawn amount * CCF?












I am pretty sure the following is true $$ \text{EAD} = \text{Drawn Amount} + \text{Undrawn Amount} \times CCF $$ where $\text{CCF}$ is the credit conversion factor. It means if an overdraft line is drawn to 500 EUR & its limit is 1000 EUR with CCF = 0.5, EAD is 750 EUR.

Unfortunately, I have a really hard time finding a reference for that.

Is there any Basel paper or similar which shows that the equation above holds or possibly an alternative version if my formula is incorrect?

## Answer by nyk (score 4, accepted)

https://quant.stackexchange.com/a/58791

Your equation is right. There are 2 ways to write EAD:

- EAD = Drawn + a x Undrawn; or

- EAD = a x Limit.

In both equations, a is called CCF but it is derived/estimated differently depending on which equation you use.

You can refer to the paper "EAD Estimates for Facilities with Explicit Limit" by Moral.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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