Methodology for estimating EAD or conversion factors

17.1 Firms may choose to provide own estimates of EAD in place of the own estimates of CF in accordance with Article 166D(3) of the Credit Risk: Internal Ratings Based Approach (CRR) Part. Firms are also required to estimate EAD for certain exposures according to Article 166D(4) of the Credit Risk: Internal Ratings Based Approach (CRR) Part.

17.2 The PRA considers that there are a number of potentially compliant approaches to estimate EAD and that an acceptable approach is to estimate EAD as a percentage of total limit (Limit Factor estimation).

17.3 The PRA considers that firms estimating Limit Factors may either:

(a) use Limit Factor estimates as an intermediate step to obtain formulaically derived long-run average and downturn CF estimates in accordance with Articles 182(1)(a) and 182(1)(b) of the Credit Risk: Internal Ratings Based Approach (CRR) Part; or

(b) use long-run average and downturn Limit Factors to obtain estimates of EAD in accordance with Article 182(1)(a) and Article 182(1)(b) of the Credit Risk: Internal Ratings Based Approach (CRR) Part.

17.4 CRR Article (4)(1)(56) defines CF such that the extent of a commitment is determined by the advised limit. The PRA therefore does not expect firms to include unadvised limits when determining the limit at the point of observation for the purpose of calculating realised and estimated CFs.