Core Path · L4.2.03

Off-balance sheet items and other exposures

12 minCredit riskStandardised approachCCFDefaultEquityCRE20

Math Atoms

By the end you will be able to

  1. 1Turn off-balance sheet items into exposure with the SA credit conversion factors, including 10% on lines the bank can cancel, and say what F-IRB and A-IRB use instead.
  2. 2Weigh a defaulted exposure on the SA, net of specific provisions, and explain the 20% provision threshold.
  3. 3Weigh equity, subordinated debt and other assets, and tell them apart from the items deducted from capital.

Why it matters

RiskAtoms Bank plc has promised £11,800m it has not yet lent: undrawn facilities, card limits, overdrafts and mortgage offers. None of it is on the balance sheet. On the standardised approach it becomes £4,000m of exposure and £2,635.7m of RWA. The £2,400m of cards and overdrafts the bank can cancel at any time cost nothing under the old rules. From 1 January 2027 they add £136.7m in the UK.

Core explanation

Promises, defaults and everything else

Off-balance sheet items

L3.3.09: Exposure at default showed that borrowers draw on their lines as they weaken. An off-balance sheet item is therefore converted to exposure with a credit conversion factor: EAD = CCF × the nominal amount (CRE20.94). The exposure then takes the counterparty's risk weight, as if the line were drawn. The SA has six factors.

ItemBasel 3.1Basel I (1988)US today
Direct credit substitutes (general guarantees, financial standby letters of credit) (CRE20.95)100%100%100%
Note issuance and revolving underwriting facilities (CRE20.96)50%50%No own row: a commitment, 20% or 50%
Transaction-related contingencies (performance bonds, bid bonds, warranties) (CRE20.97)50%50%50%
Commitments, whatever their maturity (CRE20.98)40%50% over a year; 0% up to a year50% over a year; 20% up to a year
Short-term self-liquidating trade letters of credit (CRE20.99)20%20%20%
Commitments the bank can cancel unconditionally at any time without notice (CRE20.100)10%0%0%

The big change is at the bottom. Basel I gave unconditionally cancellable commitments, and commitments of up to a year, a 0% factor: no exposure at all. Basel 3.1 sets 10% for lines the bank can cancel and 40% for every other commitment, whatever its maturity (CRE20.98, CRE20.100). A right to cancel is worth less than it looks: banks rarely cancel a customer's card or overdraft, and they may not see the trouble before the line is drawn.

Sort itWhich CCF?

Each item is off the balance sheet. Which credit conversion factor applies on the Basel SA?

  • A standby letter of credit that backs a customer's commercial paper

  • A performance bond: the bank pays if a builder fails to finish a contract

  • An undrawn five-year revolving credit facility to a company

  • A three-month documentary letter of credit, secured on the goods being shipped

  • An undrawn credit card limit the bank can cancel at any time without notice

  • An underwriting facility that guarantees a borrower can issue notes

The bank's off-balance sheet book, from m4-1:

ItemAmountCCFEADSA weightSA RWARWA as used
Undrawn credit facilities to companies8,000.040%3,200.070.3%2,250.31,366.2 (IRB)
Undrawn liquidity facilities to companies500.040%200.070.3%140.685.4 (IRB)
Undrawn facilities to banks300.040%120.030.0%36.036.0
Undrawn card limits, transactors1,441.910%144.245.0%64.964.9
Undrawn card limits, revolvers558.110%55.875.0%41.941.9
Undrawn overdraft limits400.010%40.075.0%30.030.0
Mortgage offers (pipeline)600.040%240.030.0%72.025.5 (IRB)
Off-balance sheet credit11,800.04,000.02,635.71,649.8

Two items in m4-1's list, £400m and £300m of collateral the bank might have to post, are liquidity outflows rather than promises to lend, so they carry no credit RWA. The corporate lines weigh 70.3% on average: the mix of corporate weights from L4.2.01: The standardised approach: corporates, banks and sovereigns.

On the IRB approaches

F-IRB uses the SA's conversion factors (CRE32.33). So the bank's £8,500m of undrawn corporate lines are £3,400m of EAD on both approaches. Only the weight differs: £2,390.9m of RWA on the SA against £1,451.5m on F-IRB. Ostreth alone has £2,344.8m undrawn: £937.9m of EAD, £469.0m of RWA at its 50% SA weight, £300.1m on F-IRB.

A-IRB banks may estimate their own CCFs, but only for undrawn revolving commitments that would not get 100% on the SA. Even then EAD cannot fall below the drawn amount plus 50% of the undrawn amount converted at the SA factor (CRE32.36). L4.2.04: The IRB approach sets this floor beside the others.

Defaulted exposures

A defaulted exposure is one more than 90 days past due, or owed by a defaulted borrower: one that has had a distressed restructuring, for example, or that the bank judges unlikely to pay in full (CRE20.104). On the SA its specific provisions come off first, and the rest weighs (CRE20.106):

  • 150% if specific provisions are less than 20% of the outstanding amount;
  • 100% if they are 20% or more.

A defaulted residential mortgage that does not depend on the property's rents weighs 100% net of provisions whatever their size (CRE20.107). The higher weight for thinly provisioned loans pushes banks to recognise losses early.

L3.3.17: Early warning, watchlists and workout followed Graybeck Plastics into a distressed restructuring. On the bank's book its subordinated loan is £298.6m, weighed at 150% before default (£448.0m of RWA). In default the bank holds £227.6m of specific provisions, m3-3's stage 3 expected loss scaled to the book: 76.2% of the loan. That is well over 20%, so the £71.0m left weighs 100%. The worked example goes through the IRB side.

Equity, subordinated debt and other assets

Shares are riskier than loans: the holder is paid last and has no maturity. The SA weighs equity at 250% (CRE20.57), unlisted speculative stakes in young firms at 400%, and holdings under legislated programmes that support parts of the economy at 100%, up to 10% of the bank's total capital. Subordinated debt and capital instruments other than equity, where not deducted, weigh 150% (CRE20.60; CRE20.57–20.62 cover all of these). Premises, equipment and other assets weigh 100%; notes and coin and gold bullion held against gold liabilities 0%; cash items in the course of collection 20% (CRE20.110).

ItemAmountWeightRWARule
Listed shares in banks and insurers (non-significant)120250%300CRE20.57; CAP30.22–30.26 (below threshold)
Other listed shares (banking book)250250%625CRE20.57
Deferred tax assets from temporary differences60250%150CAP30.32–30.34
Significant investment: 30% of an asset manager100250%250CAP30.29–30.34
Premises and equipment200100%200CRE20.110
Prepayments and other receivables50100%50CRE20.110
Other exposures7801,575

Deferred tax assets from temporary differences and the 30% stake in an asset manager are below the thresholds for deduction, so they weigh 250% (L4.1.02: Common Equity Tier 1). Graybeck's subordinated loan, at £448.0m, sits with the corporates in L4.2.01: The standardised approach: corporates, banks and sovereigns. And some assets get no weight at all, because they are deducted from CET1:

Deducted from CET1AmountRule
Goodwill300CAP30.7
Other intangibles (software)200CAP30.7
Deferred tax assets from tax losses30CAP30.9
Deducted530

A deduction already costs £1 of capital per £1 of asset. A 100% weight would add only 8p, so weighing a deducted asset as well would count it twice.

The formal version

Exposure is a sum and a product (M-A01: Percentages); the default weight is a step at 20%. For a line with drawn amount D and undrawn amount U:

EADSA=D+CCF×U(CRE20.94)EADA-IRB≥D+50%×CCFSA×U(CRE32.36)RWAdefaulted=(O−SP)×{150%SP<20%×O100%SP≥20%×O(CRE20.106)\begin{aligned} \text{EAD}_{\text{SA}} &= D + \text{CCF} \times U \quad(\text{CRE20.94}) \\[4pt] \text{EAD}_{\text{A-IRB}} &\ge D + 50\% \times \text{CCF}_{\text{SA}} \times U \quad(\text{CRE32.36}) \\[4pt] \text{RWA}_{\text{defaulted}} &= (\text{O} - \text{SP}) \times \begin{cases} 150\% & \text{SP} < 20\% \times \text{O} \\ 100\% & \text{SP} \ge 20\% \times \text{O} \end{cases} \quad(\text{CRE20.106}) \end{aligned}

O is the outstanding amount and SP the specific provisions. The step makes RWA fall faster than the provision rises at 20%: on a £100m loan, £19m of provisions leaves £121.5m of RWA and £20m leaves £80.0m.

Try it

Pick an item and watch its CCF turn the nominal amount into EAD; compare the Basel I and US factors. Then switch to a defaulted loan and move the provision slider across the dashed 20% line.

Try itUndrawn lines and defaulted loans

Exposure

Counterparty's risk weight

Credit conversion factor40%
RWA£200.0m
EAD = CCF × nominal£200.0m
RuleCRE20.98
Basel I (1988)50% over a year; 0% up to a year
US today (12 CFR 217.33)50% over a year; 20% up to a year

The CCF is the share of today's undrawn amount the rules expect to be drawn by the time a borrower defaults. The risk weight is then the counterparty's, as if the line were drawn.

Illustrative amounts, £ millions.

Worked example

Graybeck in default, three ways

£ millions, from the bank's book.

Graybeck's subordinated loan

Step 1 of 6
  1. 1

    Before default

    £298.6m of subordinated debt: £448.0m of RWA on the SA at 150%, £1,005.0m on F-IRB with the 75% subordinated LGD and the grade 9 PD.

Illustrative dataRiskAtoms Bank plc's capital book

The same made-up UK bank as Level 3: £67bn of assets and £4bn of equity at 31 December 2025, in £ millions. Module 4.1 adds its regulatory layer: own funds, deductions, risk-weighted assets by risk type, buffers, the leverage exposure and MREL, computed from the Level 3 credit, trading, derivatives and operational risk books. Every figure is illustrative, not any bank's data.

Pro forma. The book applies Basel 3.1, the 2017 finalisation of Basel III, to the 31 December 2025 balance sheet. On that date the bank still reported under the old UK CRR. The UK applies Basel 3.1 from 1 January 2027, and the internal model approach for market risk from 1 January 2028 (PRA PS1/26, paras 1.23 and 1.24). So the book shows the bank as it would look under the new rules.

Credit RWA in Module 4.2. Corporates on foundation IRB £8,934.7m (standardised £13,412.2m), mortgages on retail IRB £3,526.3m (standardised £8,949.6m), and the portfolios that stay on the standardised approach £5,277.0m. With everything standardised, credit RWA would be £27,638.9m: the credit part of the standardised total that the output floor works from.

Regulatory lens

Status as at 3 November 2026 as at 3 Nov 2026.

In the UK

The PRA applies the 10% factor to unconditionally cancellable commitments from 1 January 2027 with no transition (PS9/24, paras 2.46–2.47); the UK CRR gave them 0%. On the bank's cards and overdrafts that is £136.7m of new RWA. The PRA also sets 50%, not 40%, for UK residential mortgage commitments (PRA2026/1, Article 111, Table A1). Under its loan-splitting (SS10/13, July 2026, Example 2) the bank's offers become £300m of EAD on 40% of the property value, all at 20%: £60m of RWA, against £72m on the Basel whole-loan table. Equity rises to 250% in steps (PRA2026/1, Annex C, rules 4.2–4.3): 160% in 2027, 190% in 2028, 220% in 2029, 250% in 2030. On the bank's £370m of shares that is £592m, £703m, £814m, £925m of RWA. Higher risk equity steps from 220% to 400%.

In the EU

The CRR as amended by Regulation (EU) 2024/1623 introduces the 10% factor, with a transitional period in which banks may keep a lower one (recital 23). The higher equity weight is phased in over five years, and some existing strategic stakes are grandfathered (recital 9). Dates are in L4.1.08: Basel 3.1 from 2027: UK, EU and US.

In the US

The US rules keep the older structure: 0% for unconditionally cancellable commitments, 20% for other commitments with an original maturity of up to a year, 50% beyond a year (12 CFR 217.33). A loan 90 days or more past due weighs 150% on the unsecured, unguaranteed part (12 CFR 217.32).

Spark Atoms

Spark AtomThe 364-day facility
Basel I gave commitments of up to one year a 0% factor (Annex 3). Lenders and borrowers duly wrote standby facilities for 364 days and renewed them each year. Basel 3.1's 40% for any commitment, whatever its maturity, ends the trick.
Spark AtomA £1m provision worth £41.5m of RWA
On a £100m defaulted loan, provisions of £19m leave £121.5m of RWA at 150%. One more £1m of provisions crosses 20% and drops the RWA to £80m: £1m of loss recognised removes £41.5m of RWA.

Key takeaways

  • Off-balance sheet items become exposure through credit conversion factors: 100% for guarantees, 50% for performance bonds and underwriting facilities, 40% for commitments, 20% for trade letters of credit, 10% for lines the bank can cancel.
  • F-IRB uses the SA factors; A-IRB may estimate its own only for revolving lines, with a floor. The bank's off-balance sheet book: £4,000m of EAD, £2,635.7m of SA RWA.
  • A defaulted exposure weighs 150% net of specific provisions, or 100% once provisions reach 20% of the outstanding amount; defaulted home loans 100%.
  • Equity weighs 250% (400% for speculative unlisted stakes), subordinated debt 150%, other assets 100%, cash 0%.
  • Deducted items such as goodwill get no risk weight: the bank deducts £530m instead.

Reaction

Check what stuck

Question 1 · objective 1

A bank has £2,000m of undrawn credit card limits it can cancel at any time. The cardholders are revolvers at 75%. What RWA do the limits add on the Basel SA, in £m?

£m

Question 2 · objective 1

The bank issues a £40m performance bond for an unrated corporate customer that weighs 100%. What are the RWA, in £m?

£m

Question 3 · objective 2

A £100m corporate loan is in default, and the bank holds £15m of specific provisions against it. What are its SA RWA, in £m?

£m

Question 4 · objective 1

Under A-IRB, where may a bank use its own CCF estimates?

Question 5 · objective 3

The bank holds £300m of goodwill on its balance sheet. What risk weight does it carry?

Glossary

Off-balance sheet item
Off-balance sheet item: a promise that may become a loan or a payment, such as an undrawn facility, a guarantee or a letter of credit. It is not on the balance sheet until it is drawn or called.
Credit conversion factor (CCF)
Credit conversion factor (CCF): the percentage of an off-balance sheet amount that counts as exposure. EAD = CCF × the nominal amount (CRE20.94).
Unconditionally cancellable commitment
Unconditionally cancellable commitment: a line the bank can cancel at any time without notice, or that cancels automatically if the borrower's credit weakens. 10% CCF under Basel 3.1 (CRE20.100).
Direct credit substitute
Direct credit substitute: a promise to pay if the customer does not, such as a general guarantee of debt or a standby letter of credit backing a loan or bond. 100% CCF (CRE20.95).
Defaulted exposure
Defaulted exposure: one more than 90 days past due, or owed by a defaulted borrower: for example one that has had a distressed restructuring, or that the bank judges unlikely to pay in full (CRE20.104).
Specific provision
Specific provision: an allowance set against a particular loan's expected loss. On the SA, exposures are measured net of it (CRE20.1).
Equity exposure
Equity exposure: a holding of shares or other instruments that give a residual claim on a company's assets and income. 250% on the SA (CRE20.57).
Deduction
Deduction: an asset subtracted from capital itself, such as goodwill. It gets no risk weight, because it already costs £1 of capital per £1 (CAP30).

Deep Dives & Origins

Deep Dives

  • Basel Committee on Banking Supervision, CRE20, paras 20.57–20.62 and 20.94–20.110: equity, off-balance sheet items, defaulted exposures and other assets. Intermediate.
  • Basel Committee on Banking Supervision, CRE32, paras 32.33–32.36: exposure at default on the IRB approaches. Advanced.

Origins

  • Basel Committee on Banking Supervision, CRE20, paras 20.1, 20.57–20.62, 20.94–20.110 (chapter PDF labelled effective 1 January 2028), bis.org.
  • Basel Committee on Banking Supervision, CRE32, paras 32.33–32.36, bis.org.
  • Basel Committee on Banking Supervision, International convergence of capital measurement and capital standards, July 1988, Annex 3.
  • Prudential Regulation Authority, PS9/24, September 2024, paras 2.46–2.50.
  • Prudential Regulation Authority, PRA2026/1 (PS1/26 Appendix 1), January 2026, Table A1 and Annex C.
  • Prudential Regulation Authority, SS10/13 Standardised approach, July 2026, para 5.13.
  • Regulation (EU) 2024/1623, Official Journal of the European Union, 2024, recitals 9 and 23.
  • 12 CFR 217.32 and 217.33, US Code of Federal Regulations.

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