Use of an insitution's own estimates of conversion factors

Article 151(8) of Regulation (EU) No 575/2013 (CRR) states that the conversion factors specified in Article 166(8) should be applied to those exposures belonging to the exposure classes referred to in Article 147(2)(a) to (c), unless the institution has been permitted to use its own estimates of conversion factors in accordance with Article 151(9). According to Article 151(9) of the CRR, a competent authority can permit institutions to use own estimates of conversion factors for exposures belonging to the exposure classes 'central government and central banks', 'institutions', and 'corporates' as listed in Article 147(2)(a) to (c). Institutions using the IRB approach must also use own estimates of conversion factors for exposures belonging to the retail exposure class according to Article 151(7) of the CRR. A conversion factor is defined in Article 4(56) of the CRR as "the ratio of the currently undrawn amount of a commitment that could be drawn and that would therefore be outstanding at default to the currently undrawn amount of the commitment, the extent of the commitment being determined by the advised limit, unless the unadvised limit is higher". This definition makes it clear that the notion of a conversion factor is only relevant for certain types of exposures, and not for all off-balance sheet exposures. This is supported by the fact that the CRR does not provide for a competent authority to permit institutions to use their own estimates of LGDs and conversion factors for any other exposure class other than those explicitly referred to in points (a) to (c) of Article 147(2) of the CRR. The treatment of off balance sheet items other than those mentioned in paragraphs (1) to (8) of Article 166 of the CRR is specified in Article 166(10), which also applies to all IRB banks. According to this paragraph, the exposure value shall be a percentage of its value, based on the classification of off-balance sheet items established in Annex I. This provision makes no reference to the notion of 'conversion factors', simply referring to the use of a pre-determined 'percentage of its value', leaving no scope for own estimation. Accordingly, an institution's own estimates of conversion factors can only be used for the items listed in Article 166(8) of the CRR.