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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Credit conversion factor (CCF)

What is a credit conversion factor, and why does an undrawn limit use capital?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

A credit conversion factor is the percentage that turns an undrawn commitment or an off-balance-sheet item, such as a guarantee or a letter of credit, into an on-balance-sheet equivalent for measuring exposure and capital. Under the standardised approach the supervisor sets the factors by type: lower for a commitment the bank can cancel at any time or a short trade letter of credit, higher for a guarantee of a financial debt; some banks approved to use their own models estimate their own for certain facilities. On a US$10 million revolver with US$4 million drawn, a 40% factor gives an exposure of US$6.4 million.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WHAT IT IS NOT

Exposure at default is the whole amount the bank expects to be owed if the borrower defaults; the credit conversion factor is the share of the undrawn or contingent part that is counted in it.

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