CCF (credit conversion factor)

CCF (Credit Conversion Factor)

The credit conversion factor estimates how much of an undrawn credit commitment will actually be drawn by the time a borrower defaults. It matters because many credit facilities are revolving or only partially used: a borrower might have a $10 million line but only $4 million drawn today. The CCF converts the undrawn portion into an expected additional exposure, so the lender can estimate its true exposure at default rather than just its current outstanding balance.

If a facility has $6 million undrawn and a CCF of 50%, the lender assumes $3 million of that undrawn amount will be drawn before any default, giving a total expected exposure at default of $7 million ($4 million already drawn plus $3 million expected). The logic behind a high CCF is behavioral: borrowers heading toward distress tend to draw down available credit lines aggressively, precisely when the lender would least want them to, so undrawn commitments can't be treated as risk-free.

CCF is a key input into exposure at default (EAD), one of the three components of expected loss alongside probability of default and loss given default. Getting it wrong means underestimating exposure exactly where accuracy matters most, on the facilities most likely to be fully drawn at the worst possible time.

Related: Credit risk math: PD, LGD, EAD, Expected Loss, Unexpected Loss.