IFRS quantitative finance series
IFRS 9 EAD and Credit Conversion Factors for Revolving Facilities
Exposure at default is straightforward for a fully drawn bullet loan and much harder for revolving credit. Future drawings can rise as borrower quality deteriorates, while contractual cancellation rights may not describe how the bank manages customers in practice.
Build the exposure path
EAD should reflect scheduled amortisation, prepayment, interest, fees and expected drawings over each future period. For revolving facilities, usage behaviour before default often varies by utilisation, delinquency, limit management and borrower segment.
Beyond a single conversion factor
A static credit conversion factor can be useful but may hide horizon effects and nonlinear behaviour near default. Cohort or survival-based drawdown models can create period-specific exposure paths, provided they remain explainable and stable.
Behavioural life
The expected life of some revolving instruments can extend beyond the contractual notice period when normal credit-risk management does not limit exposure immediately. Assumptions should be based on actual practice and reviewed when strategy changes.
Quantitative expression
Implementation controls
- Reconcile limits and balances across systems.
- Backtest drawdowns by months before default.
- Reflect limit cuts and account closures realistically.
- Review behavioural life after policy changes.