Risk parameter: Conversion factor (CF/EAD)

For conversion factor modelling, we can choose between typical historical or cohort methodological logics, and ITCB (Bankárképző) serves the Bank's methodological needs accordingly.

Typically, two component parameter estimates are developed: 

  • The first component parameter measures the probability of the utilization of the free float by estimating the utilization of the free float between 0-100%. 
  • A second parameter estimates the degree of over-utilization as a percentage of the limit amount, which may be caused by possible charges for delays accumulated up to the default date. 

The logic of the model design follows the logic defined for the LGD parameter, a direct or indirect model can be developed for this risk parameter.

The end result of the modelling and calculation is a well-functioning, stable EAD model or calculation, with the latitude allowed by the data.

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Béla Öcsi
Béla ÖcsiCEObocsi@itcb.hu

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