By Francisco Covas and Brett Waxman
Recently, The Clearing House (TCH) released empirical analysis (TCH Study) utilizing data from large U.S. bank holding companies to analyze the impact that could result from the implementation of the BCBS-proposed revisions to the Standardized Approach for credit risk with respect to credit conversion factors (CCFs) for off-balance sheet commitments.
With respect to wholesale portfolios, the TCH Study found that the aggregate historical CCF for wholesale portfolios of the Wholesale Participating Banks is significantly lower (40.8%) than the BCBS-proposed minimum of 50% and the BCBS-proposed maximum of 75%, which indicates that the proposed minimum CCF is too high and the BCBS-proposed maximum CCF is nearly double the historical experience of the Wholesale Participating Banks. For retail portfolios, the TCH Study found that the aggregate CCF for all retail unconditionally cancellable commitments of the Retail Participating Banks is significantly lower (7.4%) than the BCBS-proposed minimum of 10% and the BCBS-proposed maximum of 20%, which indicates that the proposed minimum CCF is too high and the BCBS-proposed maximum CCF is nearly triple the historical experience of the Retail Participating Banks.
Using the BCBS proposed CCFs for wholesale and retail exposures would, for U.S. Advanced Approaches Institutions, increase TLE between $405B and $1.23T, and decrease the SLR up to 60 bps. Alternatively, if U.S. Advanced Approaches Institutions chose to maintain existing SLR levels and hold their EAD and TLE constant, there would need to be a reduction in retail UCCs and wholesale commitments of up to $1.81T in the aggregate (or 15% of all commitments at U.S. Advanced Approaches Institutions).