Financial Risk & Regulation

On 18 August 2025, the European Banking Authority (EBA) published the Final Report on the Draft Regulatory Technical Standards (RTS) on the allocation of off-balance sheet items and the specification of factors that might constrain institutions’ ability to cancel unconditionally cancellable commitments (EBA/RTS/2025/06). The RTS does not introduce new requirements beyond those set out in CRR3, but clarifies the existing framework, contributing to a level playing field and supporting consistent classification and supervisory convergence across the EU.

CRR3, which became applicable on 1 January 2025 as part of the EU’s implementation of the final Basel III framework, introduced a revised approach to the recognition and treatment of off-balance sheet exposures in the calculation of capital requirements. Compared to CRR2, the most significant change in this area is the modification of the classification criteria for Credit Conversion Factors (CCFs) under the standardised approach and the risk weights of CCF categories[1]. The EBA’s recently published final RTS draft aims to clarify the CRR3 provisions on the treatment of off-balance sheet items.

How has the regulatory treatment of off-balance sheet exposures evolved under CRR3 in the context of capital requirement calculations?

In the context of capital requirement calculations, the CRR recognises that certain off-balance sheet items do not constitute unconditional payment obligations. The Credit Conversion Factor is a percentage used to quantify the likelihood that an off-balance sheet item may materialise into an actual exposure in the event of counterparty default. This probability depends heavily on the presence of other conditions embedded in the off-balance sheet items that are not related to credit risk. Taking this conditionality into account, the CRR classifies off-balance sheet items into different buckets, each with a specific CCF percentage under the standardised approach.

Under CRR2, off-balance sheet items were classified into four categories with CCFs of 100%, 50%, 20%, and 0%. CRR3 introduces a five-tier bucket system with CCFs of 100%, 50%, 40%, 20%, and 10%. The 0% CCF category has been removed, and Unconditionally Cancellable Commitments (UCCs) are now placed in the newly created 10% category. The previous 100%, 50%, and 20% buckets remain, but a new 40% category has been added between them, mainly containing items that were previously classified in the neighbouring categories. Although the 0% bucket has been removed from CRR3, the regulation still allows a 0% CCF in a specific case: for contractual arrangements offered exclusively to corporates that have not yet become obligations but may do so upon client acceptance. These are typically non-binding offers that the bank may cancel unconditionally at any time without notice. The changes reflect the Basel III objective of enhancing the risk sensitivity of the standardised approach and mitigating cliff effects in capital requirements, such as those previously caused by maturity-based thresholds.

What criteria must be considered when determining CCF values?

The draft RTS aims to support the practical application and EU-wide harmonisation of CRR3 rules on off-balance sheet items. It details the criteria for classifying items not listed in the CRR into one of the five buckets. The classification is based on the extent to which the institution is exposed to credit loss risk in the event of client default. The higher the likelihood that the off-balance sheet item becomes an actual exposure upon default, the higher the CCF to be applied. Key criteria include the presence of financial covenants, the requirement for non-credit risk events to occur before the institution becomes exposed to credit risk, and the existence of contractual drawdown options.

Based on these criteria, bucket 1 (with a CCF of 100%) includes items where the institution’s exposure to credit risk in the event of counterparty default is not contingent on any future non-credit risk event — for example, a binding obligation to disburse a loan. Bucket 2 (with a CCF of 50%) includes non-trade finance items where at least one non-credit risk event or condition must occur before the institution becomes exposed to credit loss risk. An example of such an item is a customs guarantee linked to future customs procedures. Bucket 3 (with a CCF of 40%) includes items where the client has a contractual right to draw but has not yet exercised it, e.g. the undrawn amount of factoring arrangements. Bucket 4 (with a CCF of 20%) primarily includes off-balance sheet trade finance items, while Bucket 5 (with a CCF of 10%) covers unconditionally cancellable commitments (UCCs). For buckets 4 and 5, the draft RTS does not define positive classification criteria beyond those in Annex I of the CRR. However, for bucket 5, it identifies four factors that may constrain the institution’s ability to cancel its UCC:

1. Deficiencies in the risk management procedures, e.g. if risk monitoring structures or IT systems do not allow cancellation in a timely manner.

2. Commercial considerations, that prevent the institution from cancelling the commitment, for example, to preserve client relationships.

3. Reputational risks that may arise from the negative market perception of cancelling the commitment.

4. Litigation risks, where the client would suffer a loss from the cancellation of the commitment.

If any of the above factors constrain the institution’s ability to cancel an unconditionally cancellable commitment (UCC), the affected UCC cannot be classified under Bucket 5. In such cases, the UCC must be assigned based on its actual risk profile, which means a higher CCF will apply.

The draft RTS anticipates that institutions will be subject to a reporting obligation for the classification of off-balance sheet items not listed in Annex I of the CRR. As an initial step, the C 07.00 COREP template will be extended to include a new row, 085, which will serve as the foundation for further supervisory and regulatory measures.

Next steps

The draft RTS will be submitted to the European Commission for approval, followed by review by the European Parliament and the Council. It is expected to enter into force upon publication in the Official Journal of the European Union. Since the RTS merely clarifies provisions already in effect under CRR3, institutions across the EU are strongly encouraged to begin reviewing and updating their internal policies and systems to ensure compliance with the new requirements.

Hungarian implications

In Hungary, the MNB addresses the treatment of off-balance sheet items in the context of credit risk measurement in Chapter VIII.1.6 of the ICAAP-ILAAP-BMA Handbook. The Handbook confirms that the MNB generally expects institutions to comply with the conditions set out in the CRR. However, in the absence of internal estimates, the MNB considers it justified to apply a 50% parameter for determining Pillar 2 capital requirements for off-balance sheet items that carry a 0% or 20% regulatory CCF under CRR2. The MNB supports the application of stricter CCF values than those defined in the CRR with two arguments: (1) based on experience, the 0% and 20% CCFs do not adequately capture the actual risk of items classified into these buckets; (2) it aims to encourage the use of advanced approaches.

The currently applicable version of the Handbook does not yet reflect the CRR3 amendments related to CCFs, which—consistent with the MNB’s experience—introduce stricter treatment for the 0% and 20% buckets. Specifically, the CCF for the former 0% bucket has been increased to 10%, and certain items previously classified under the 20% bucket have been reallocated to a newly established 40% bucket. Given that this section of the Handbook refers to CRR2 provisions that have since undergone significant changes—partly addressing concerns previously raised by the MNB—it is our view that the CCF-related sections of the ICAAP-ILAAP-BMA Handbook will likely require revision as part of the update expected by the end of this year.

How can we help?

KPMG is pleased to support its clients in interpreting regulatory requirements and industry practices through tailored workshops and market benchmarking analyses. With our expert team, we assist financial institutions in developing their risk management and capital requirement calculation functions based on their specific needs.

Newsletter prepared by: Róbert Mátrai

[1] The Credit Conversion Factor (CCF) is a key concept in bank risk management, particularly in the calculation of capital requirements. It quantifies the proportion of an undrawn or conditional commitment (e.g. credit line, guarantee, commitment) that may convert into an actual credit risk exposure in the event of a client default. Regulatory authorities set out detailed rules specifying which types of commitments require which CCF value to be applied.