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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?

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1 Answer 1

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

  1. EAD = Drawn + a x Undrawn; or
  2. 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.

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  • $\begingroup$ Thanks @nyk. To conclude, there is no industry standard and both can be possible. $\endgroup$
    – PalimPalim
    Oct 19, 2020 at 13:22
  • $\begingroup$ @PalimPalim Theoretically there is no difference between the 2 equations. In practice, corporate/commercial product guys would prefer your version since undrawn, which could be referred to as "headroom", is explicitly included in the equation. $\endgroup$
    – nyk
    Oct 20, 2020 at 0:12
  • $\begingroup$ but using my example numbers first equation: 500 + 500 * 0.5 = 750 and 2nd equation 1000 * 0.5 = 500. What am I missing here? and here are ccfs bis.org/bcbs/publ/d424_hlsummary.pdf so which equation shall I use here? $\endgroup$
    – PalimPalim
    Oct 20, 2020 at 11:09
  • $\begingroup$ As mentioned, in both equations, the "parameters" are called CCF but they are derived/estimated differently. Probably the example you chose confused you. If you look carefully, the CCF in your example is a percentage/fraction of undrawn, which turns out to be [fortunately/unfortunately] 50%. When you applied this value of CCF in the second equation of course it won't work. $\endgroup$
    – nyk
    Oct 22, 2020 at 0:33
  • $\begingroup$ Thanks @nyk. The paper states that the first version here, 2nd version in the paper is the one applied by Basel and hence the one which is relevant for me. $\endgroup$
    – PalimPalim
    Oct 23, 2020 at 7:20

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