Rating Models and Validation - Oesterreichische Nationalbank

The level of utilization for off-balance-sheet transactions can range between
0 and 100% at the time of default. The chart below illustrates this point:
Chart 93: Objective in the Calculation of EAD for Partial Utilization of Credit Lines
In the case of guarantees for warranty obligations, the guarantee can only be
utilized by the third party to which the warranty is granted. In such a case, the
bank has a claim against the borrower. If the borrower defaults during the
period for which the bank granted the guarantee, the utilization of this guarantee
would increase EAD. The utilization itself does not depend on the borrowerÕs
creditworthiness.
In the bankÕs internal treatment of expected loss, the repayment structure of
off-balance-sheet transactions is especially interesting over a longer observation
horizon, as the borrowerÕs probability of survival decreases for longer credit
terms and the loss exposure involved in bullet loans increases.
8.2 Customer Types
The differentiation of customer types is relevant with regard to varying behavior
in credit line utilization. Studies on the EAD of borrowers on the capital market
and other large-scale borrowers have shown that lines of credit are often not
completely utilized at the time of default. Moreover, it has been observed that
the EAD for borrowers with whom the bank has agreed on covenants tends to
decrease as the borrowerÕs creditworthiness deteriorates, and that a large
number of possible ways to raise debt capital also tends to lower EAD. In contrast,
retail customers as well as small and medium-sized enterprises are more
likely as borrowers to overdraw approved lines of credit. It is rather unusual to
agree on covenants in these customer segments, and the possible ways of raising
debt capital are also more limited than in the case of large companies. The table
below can serve as a basis for differentiating individual customer groups. In
some cases, it may also be advisable to aggregate individual customer types.
Rating Models and Validation
Guidelines on Credit Risk Management 163