Point in time when facility or limit is considered to be a commitment

Does a bank’s legally binding offer for a facility or limit constitute a commitment only after the client has accepted the bank’s offer?

The current CRR does not provide a definition of the term “commitment”. For the exposure value determination under the Credit Risk Standardised Approach (CRSA), Article 111 (1) CRR stipulates that the “exposure value of an off-balance sheet item listed in Annex I shall be [a further specified] percentage of its nominal value after reduction of specific credit risk adjustments and amounts deducted in accordance with point (m) of Article 36(1)”. For the exposure value determination under the Advanced Internal-Ratings Based Approach (A-IRBA), Article 166 (8) CRR refers to the “committed but undrawn amount multiplied by a conversion factor”. In our view, ‘committed’/’commitment’ means that there is (i) a legally binding contractual arrangement that has been offered by the institution and accepted by the client to extend financing, purchase assets or issue guarantees. The understanding that an offer to extend financing must have been accepted by the other party, i.e. that there must be a legally binding contractual arrangement to provide financing to the client that has been entered into by all relevant parties, in order to qualify as commitment is aligned to both paragraph 127 of the ECB guide to internal models (see point 127 b)) as well as paragraph 78 of the Basel 4 text (BCBS 424). Therefore, we believe that a legally binding facility or limit constitute a commitment only after the client has accepted the bank’s offer. This view applies to retail as well as non-retail obligors.