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FRM Part II · FRM Exam Part II · High-level Summary of Basel III Reforms

Under the Basel III revised standardised approach, how is the credit conversion factor (CCF) for unconditionally cancellable commitments (UCC) changed relative to Basel II?

The CCF for unconditionally cancellable commitments rises from 0% under Basel II to 10% under Basel III's revised standardised approach. This reflects that banks in practice often honour these lines during stress, so a zero conversion factor understated the exposure at default.

  1. ARaised from 0% to 10%Correct
  2. BKept at 0%
  3. CRaised from 0% to 50%
  4. DLowered from 20% to 10%

Explanation

Basel II allowed a 0% CCF for commitments that are unconditionally cancellable without prior notice. The Basel III reforms introduced a 10% CCF for UCCs, reflecting experience that banks often draw down or honour such lines in stress. The 50% factor applies to certain other commitments, not UCCs.

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