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?


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.

  • $\begingroup$ Thanks @nyk. To conclude, there is no industry standard and both can be possible. $\endgroup$ – PalimPalim Oct 19 '20 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 '20 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 '20 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 '20 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 '20 at 7:20

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