EBA · 2025_7505 Rejected question

Credit Conversion Factor Treatment - Loan Participation Agreements in Unconditionally Cancellable Facilities

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
Article 111, para. 6
Topic
Credit risk
Submitted by
Credit institution
Submitted
2025-06-23
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Question

For loan participation arrangements where Bank A (the issuing bank) originates loans classified as unconditionally cancellable and applies 0% Credit Conversion Factor (CCF) under CRR Article 111, what is the appropriate CCF treatment for Bank B as the participating bank? Specifically, should Bank B apply: - a 0% CCF - consistent with the unconditionally cancellable nature of the underlying loans issued by Bank A - Standard CCF rates (20% or higher) - based on the participation agreement structure, where Bank B cannot directly exercise the unconditional cancellation rights?

Background

Bank A and Bank B have entered into loan participation agreements where Bank A acts as the originating/issuing bank providing unconditionally cancellable (UCC) loan facilities to borrowers, while Bank B participates in the credit risk on an agreed percentage basis. Bank A has confirmed that it classifies these loan facilities as unconditionally cancellable and therefore applies 0% CCF on all undrawn balances, meaning no risk weight considerations are applied to these exposures. Under the participation arrangement, Bank B shares in the credit risk but cannot directly cancel the underlying facilities - only Bank A retains the unconditional cancellation right over the loans it issues. The question arises whether Bank B's participation in Bank A's unconditionally cancellable facilities should follow the economic substance of the underlying exposure (0% CCF) or be treated based on Bank B's indirect contractual relationship (standard CCF rates).
No answer published yet.

Original source: European Banking Authority, Q&A ID 2025_7505

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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