Credit Conversion Factor: definition and impact of final Basel III in Switzerland
Credit Conversion Factor: definition, usefulness and impact of Basel III final set of rules (also known as “Basel III Final” and/or “Basel IV”) – that’s what this page of our glossary on RegTech is all about. This concept should not be confused with CCR, which itself can cover two very different concepts.
CCF or Credit Conversion Factor: definition
CCF stands for Credit Conversion Factor. It is defined as the percentage applied to the nominal value of an off-balance sheet commitment to determine the equivalent exposure to a risk-weighted asset. For example, this rate applies to undrawn credit lines, guarantees, letters of credit, etc.
In other words, the Credit Conversion Factor is used to translate an off-balance sheet exposure into a credit exposure for the purposes of calculating the regulatory capital required under Basel standards, Basel II and III.
In simpler terms , Wikipedia offers a broad definition of CCF: a credit conversion factor is a “coefficient in the field of credit rating”. The French translation of CCF is “facteur de conversion”.
What is the conversion factor or CCF used for?
The Basel Committee and its banking regulatory framework also define and explain the Credit Conversion Factor (CCF). This is a coefficient used to estimate the potential exposure of an off-balance sheet commitment when it is converted into a risk-weighted asset.
The conversion factor is therefore an essential measure for managing credit risk. For regulators, the Credit Conversion Factor enables banks to ensure that they hold sufficient capital to meet their future obligations.
How does the Basel III Final impact the CCF in Switzerland?
The implementation of Basel III Final has been effective in Switzerland since 1 January 2025. This led to a revision of the Ordinance on capital adequacy and risk diversification for banks and securities firms (CAO). In addition, a large number of texts have been completely overhauled. Several FINMA Circulars have been repealed, and new FINMA Ordinances have been issued.
Basel III Final framework changes the CCF requirements. It increases the minimum conversion factor to 0.1 (i.e. 10%) for all off-balance sheet exposures (with one exception). This minimum conversion factor also applies to the disclosure of large exposures. Please refer to the new version of art. 117 CAO.
For this reason, unused Lombard, credit card and other credit limits now have a conversion factor of 10%. The previous regulations applied a rate of 0%.
💡To find out about the major impacts of final Basel III, consult our summary table of key changes.
What is the exception to the 10% conversion factor for unused limits?
Article 53 of the CAO provides for an exception to the 10% rate. This means that the conversion factor is 0% for credit limits granted to companies under very strict conditions.
Several conditions are required, according to the international standard approach for credit risks, known as AS-BRI. They are detailed in paragraph 5 of article 53 of the Ordinance, relating to off-balance sheet transactions.
Credit Conversion Factor: not to be confused with the Cash Conversion Ratio (CCR)
CCR is a term close to CCF, but its definition is quite different. CCR is commonly used in the world of corporate finance, not in banking. It corresponds to the ratio between the cash flows generated by an economic entity and its net profit. All activities are taken into account, including operational, investment and financial data. This financial ratio indicates the level of liquidity.
What is Credit Counterparty Risk (CCR)?
Credit Counterparty Risk (CCR) accounts for the risks that a counterparty to a transaction may default before the final completion of the payments under the transaction. It corresponds to the risk that the counterparty to the transaction may default before the final maturity of the payments scheduled under the transaction. This could happen, for example, in a derivative transaction. An economic loss could occur if the derivative transaction or portfolio of transactions with the defaulting counterparty has a positive mark-to-market value at the time of default.
For a loan, the credit risk is one-sided. Only the bank granting the credit is exposed to a potential loss. In the case of counterparty credit risk, on the other hand, the risk of loss is bilateral and fluctuates as volatility arises. The market value of the transaction may be positive or negative for either counterparty. Market value is uncertain and can fluctuate over time, depending on changes in factors affecting the market on which it depends.
👉To discover other definitions of RegTech, we suggest you return to the table of contents of our glossary.
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