Credit conversion factors applied to a revolving facility, Basel II against the Basel III standardised approach, and the commitment fee the capital implies.
An undrawn credit line is turned into exposure with a credit conversion factor (CCF) and then risk-weighted like a loan. Under the Basel III standardised approach a committed facility takes a 40 per cent CCF, so 60.0 million undrawn on a revolver to an unrated corporate becomes 24.0 million of exposure and 24.0 million of risk-weighted assets. Held at an illustrative 12 per cent of RWA, that is 2.88 million of capital for money the borrower has not taken.
Worked in full in Financial Regulation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A commitment is a promise to lend, and borrowers draw hardest when they are weakest. The standardised approach therefore treats part of every undrawn line as if it were already a loan. The conversion factors changed with the 2017 Basel III reforms, which is the whole story of this calculation:
| Facility type | Basel II | Basel III |
|---|---|---|
| Committed facility, original maturity over one year | 50% | 40% |
| Committed facility, up to one year (the 364-day line) | 20% | 40% |
| Unconditionally cancellable at any time without notice | 0% | 10% |
Implementation dates and transitional treatment differ by jurisdiction, notably for the 10 per cent factor on cancellable lines, so the local rulebook decides which column applies on a given date. In the EU, CRR3 (Regulation (EU) 2024/1623) rewrote Article 111 and Annex I of the CRR into factor buckets, with other commitments at 40 per cent and unconditionally cancellable ones at 10 per cent, the latter reached only after a transitional period. The arithmetic is the same either way.
A bank provides a 100.0 million five-year revolving credit facility to an unrated corporate, which has drawn 40.0 million. The risk weight is 100 per cent. The Pillar 1 minimum is 8 per cent of RWA, but banks hold more once Pillar 2 and buffers are added, so the case uses an illustrative 12 per cent, and prices that capital at an illustrative 12 per cent pre-tax hurdle. Funding cost and expected loss are left out so that the capital piece stands alone.
Undrawn = limit − drawn = 100.0 − 40.0 = 60.0
Exposure at default = drawn + CCF × undrawn = 40.0 + 40% × 60.0 = 64.0
RWA = EAD × risk weight = 64.0 × 100% = 64.0, of which 24.0 is the undrawn part
Pillar 1 capital on the undrawn part = 24.0 × 8% = 1.92; capital actually held at 12% = 2.88
Return the undrawn capital must earn = 2.88 × 12% = 0.346 a year
Commitment fee to cover it = 0.346 / 60.0 = 57.6 basis points on the undrawn amount
Excel: =(Drawn+CCF*(Limit-Drawn))*RW for RWA and =CCF*RW*Held*Hurdle*10000 for the fee in basis points.
The undrawn 60.0 million is 37.5 per cent of the facility's RWA. Of the 7.68 million of capital held against the whole line, 4.80 sits behind the drawn loan and 2.88 behind the promise. That last figure is what a commitment fee is supposed to pay for, and at the illustrative hurdle it takes 345,600 a year, the 57.6 basis points above.
| Facility | Rules | CCF | EAD | Undrawn RWA | Capital held on undrawn | Fee to cover, bp |
|---|---|---|---|---|---|---|
| Five-year RCF | Basel II | 50% | 70.0 | 30.0 | 3.60 | 72.0 |
| Five-year RCF | Basel III | 40% | 64.0 | 24.0 | 2.88 | 57.6 |
| 364-day facility | Basel II | 20% | 52.0 | 12.0 | 1.44 | 28.8 |
| 364-day facility | Basel III | 40% | 64.0 | 24.0 | 2.88 | 57.6 |
| Cancellable line | Basel II | 0% | 40.0 | 0.0 | 0.00 | 0.0 |
| Cancellable line | Basel III | 10% | 46.0 | 6.0 | 0.72 | 14.4 |
Two things move in opposite directions. The long committed revolver gets cheaper: its factor falls from 50 to 40 per cent and the fee needed drops from 72.0 to 57.6 basis points. The 364-day facility, built for decades around the Basel II 20 per cent factor and rolled every year, loses its advantage: RWA rises from 52.0 to 64.0, 23.1 per cent more, and it now costs exactly what the five-year line costs while giving the borrower less certainty. Cancellable overdrafts, free under Basel II, now carry 6.0 of RWA per 60.0 undrawn.
| Drawn | Undrawn | EAD | RWA | Capital held | RWA per unit drawn |
|---|---|---|---|---|---|
| 0% | 100.0 | 40.0 | 40.0 | 4.80 | n/a |
| 20% | 80.0 | 52.0 | 52.0 | 6.24 | 2.60 |
| 40% | 60.0 | 64.0 | 64.0 | 7.68 | 1.60 |
| 60% | 40.0 | 76.0 | 76.0 | 9.12 | 1.27 |
| 100% | 0.0 | 100.0 | 100.0 | 12.00 | 1.00 |
A lightly drawn line is capital-expensive per unit of loan: at 20 per cent utilisation each unit drawn carries 2.60 units of RWA. The fee needed on the undrawn amount scales with the borrower's risk weight: 43.2 basis points for a BBB-rated corporate at 75 per cent, 49.0 for an SME corporate at 85 per cent, 57.6 unrated at 100 and 86.4 for a borrower rated below BB- at 150 per cent.
Pricing a revolver on the drawn margin alone and treating the commitment fee as a courtesy. On this facility the undrawn part consumes 37.5 per cent of the capital. A commitment fee set at 35 per cent of a 160 basis point margin would be 56 basis points, just short of the 57.6 needed on capital alone before any funding or liquidity cost; mechanics of the fee itself are in how a commitment fee is calculated on a revolver. The second mistake is reusing a Basel II pricing grid that still gives the 364-day line a discount it no longer earns.
EAD is drawn plus CCF times undrawn; RWA follows at the borrower's weight. Under Basel III a committed line converts at 40 per cent regardless of tenor, so 60.0 undrawn here is 24.0 of RWA and 57.6 basis points of fee before anything else. The book's own risk-weight ladders, the capital stack and the binding-constraint test are in the free workbook for this case, and the full RWA build in how to calculate a bank's RWA.
In the Basel III standardised approach, commitments take 40 per cent whatever their maturity, and unconditionally cancellable commitments take 10 per cent. Under Basel II they were 50 per cent above one year, 20 per cent up to one year and 0 per cent if cancellable. On 60.0 million undrawn that is 24.0 million of exposure at 40 per cent.
Because under Basel II a commitment of up to one year took a 20 per cent conversion factor against 50 per cent for longer ones, so a 364-day line used less than half the capital of a multi-year one. Under the Basel III standardised approach both take 40 per cent, and on the worked facility the 364-day line's RWA rises from 52.0 to 64.0, 23.1 per cent more.
Yes. A 100.0 million committed facility with nothing drawn becomes 40.0 million of exposure at a 40 per cent factor, and 40.0 million of RWA for an unrated corporate. At an illustrative 12 per cent capital level that is 4.80 million of capital the bank holds for a loan that has not yet been made, which the commitment fee has to pay for.
This article is one calculation from Financial Regulation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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