Eurosystem credit assessment framework (ECAF)

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Objective: meeting high credit standards

The Eurosystem credit assessment framework (ECAF) defines the procedures, rules and techniques which ensure that the Eurosystem requirement of high credit standards for all eligible assets is met.

Drawing on four sources

In the assessment of the credit standard of eligible assets, the Eurosystem takes into account credit assessment information from credit assessment systems belonging to one of four sources, namely

• external credit assessment institutions (ECAIs),
• NCBs’ in-house credit assessment systems (ICASs),
• counterparties’ internal ratings-based (IRB) systems, or
• third-party providers’ rating tools (RTs).

Additionally, in the assessment of the credit standard the Eurosystem takes into account institutional criteria and features guaranteeing similar protection for the instrument holder such as guarantees.

List of credit assessment sources accepted by the Eurosystem

For details, see the

• General Documentation, Section 6.3,   1.1 MB, en, as well as the amendments set out in Guideline ECB/2009/01,  en
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Credit quality assessment

All assets accepted by the Eurosystem as eligible collateral must meet the minimum requirement (or “credit quality threshold”) of a credit assessment of credit quality step 3 in the Eurosystem’s harmonised rating scale. The Eurosystem considers a probability of default over a one-year horizon of 0.10% as equivalent to a credit assessment of credit quality step 2 and of 0.40% as equivalent to an assessment of credit quality step 3, subject to regular review.

The general credit quality threshold for asset-backed securities (ABSs) accepted for use as collateral in Eurosystem credit operations is defined as an “AAA/Aaa” rating level at issuance and a “single A” level over the lifetime of the transaction on a second-best basis. ABSs with a second-best rating of at least “single A” in the Eurosystem’s harmonised rating scale at issuance, and at all times subsequently, and with underlying assets which comprise residential mortgages or loans to small and medium-sized enterprises (SMEs), are also eligible for use as collateral in Eurosystem credit operations. For more details, see Rating requirements for asset-backed securities.

With regard to retail mortgage-backed debt instruments, the Eurosystem’s threshold is a credit assessment of credit quality step 2 (“single A”) in the harmonised rating scale.

Harmonised rating scale

The Eurosystem maps the different grades used in the scales of accepted external credit assessment institutions onto a harmonised rating scale which is subject to regular review.

ECAIs

External credit assessment institution source (ECAIs)

ECAIs are those institutions whose credit assessments may be used by credit institutions to determine risk weight exposures according to the CRD (Capital Requirements Directive). For the purposes of the ECAF, the general acceptance criteria for ECAIs are as follows:

• ECAIs must be formally recognised by the relevant EU supervisory authority for the euro area countries in which they will be used in line with the CRD.
• ECAIs must fulfil operational criteria so as to ensure the efficient implementation of the ECAF. In particular, the use of their credit assessments is subject to the availability to the Eurosystem of information on these assessments, as well as information for the comparison and the assignment (“mapping”) of the assessments with the ECAF credit quality steps and the credit quality threshold and for the implementation of performance monitoring (see Section 6.3.5 of the General Documentation).

The Eurosystem reserves the right to decide whether to accept an ECAI for its lending operations, making use, among other factors, of its performance monitoring process.

Rating requirements for asset-backed securities

The general credit quality threshold for asset-backed securities (ABSs) accepted for use as collateral in Eurosystem credit operations is defined as an “AAA/Aaa” rating level at issuance and a “single A” level over the lifetime of the transaction on a second-best basis. The “second best” rule means that not only the best, but also the second-best available ECAI credit assessment must comply with the credit quality threshold for ABSs.

ABSs with a second-best rating of at least “single A” in the Eurosystem’s harmonised rating scale at issuance, and at all times subsequently, and with underlying assets which comprise residential mortgages or loans to small and medium-sized enterprises (SMEs), are also eligible for use as collateral in Eurosystem credit operations. These ABSs need to fulfil the following requirements:

• the cash flow-generating assets backing the ABS must all belong to the same asset class, i.e. the asset class must consist of either only residential mortgages or only loans to SMEs;
• the cash flow-generating assets backing the ABS must not include loans which are non-performing at the time of issuance of the ABS or which are structured, syndicated or leveraged at any time;
• the counterparty submitting an ABS as collateral (or any third party with which it has close links) cannot act as an interest rate swap provider in relation to the ABS;
• the ABS transaction documents must contain servicing continuity provisions;
• the ABS must fulfil all other eligibility requirements applicable to ABSs, except for the “AAA/Aaa” rating requirement.

Furthermore, in accordance with the “General documentation on Eurosystem monetary policy instruments and procedures” (Section 6.3.1), the Eurosystem reserves the right to determine whether an issue, issuer, debtor or guarantor meets its high credit standards on the basis of any information it may consider relevant, and may reject or limit the use of assets or apply supplementary haircuts if required to ensure adequate risk protection of the Eurosystem, in line with Article 18.1 of the Statute of the European System of Central Banks and of the European Central Bank.

Further information on the Eurosystem’s rating rules for ABSs

• Chapter 6 of the General Documentation on Eurosystem monetary policy instruments and procedures [Annex I of Guideline of the ECB of 31 August 2000 on monetary policy instruments and procedures of the Eurosystem (ECB/2000/7)]
• 8 December 2011 - ECB announces measures to support bank lending and money market activity Press release
• FAQs on the measures to support bank lending and money market activity

ICASs

NCB in-house credit assessment system source (ICASs)

The ICAS source currently consists of the four credit assessment systems operated by

• the Banco de España,
• the Banque de France,
• the Central Bank of Ireland,
• the Deutsche Bundesbank, and
• the Oesterreichische Nationalbank.

NCBs deciding to develop their own ICAS would be subject to a validation procedure. ICASs are subject to the Eurosystem performance monitoring process.

IRB

Internal ratings-based system source (IRB)

A counterparty intending to use an IRB system to assess the credit quality of the debtors, issuers or guarantors of eligible debt instruments has to obtain the permission of its home NCB. Any branch or subsidiary of a counterparty may rely on the IRB system of its parent if the Eurosystem has accepted the use of the IRB system for ECAF purposes.

Counterparties using an IRB system are also subject to the Eurosystem performance monitoring process.

Rating tools (RTs)

The Rating Tool (RT) source consists of third-party applications that assess the credit quality of debtors using, among other information, audited accounts. The tools have to be operated by the RT providers. Counterparties wishing to use a specific RT for ECAF purposes have to submit a request to their respective NCB using the appropriate template provided by the Eurosystem, complemented by additional documentation of the RT as specified in the application form. The Eurosystem decides on the acceptance of the proposed RT. The decision is based upon the evaluation of the compliance with the acceptance criteria set by the Eurosystem.

The RT provider participating in the ECAF needs to subject itself by agreement to the Eurosystem performance monitoring process.

• Acceptance criteria for third-party rating tools within the Eurosystem credit assessment framework, December 2006,   198 kB, en
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The Eurosystem currently accepts the following credit assessment systems as RT sources:

• Coface Serviços Portugal S.A.
• ICAP S.A.
• LINCE SpA
• Creditreform Rating AG

The Eurosystem maps the different grades of accepted RTs’ scales as follows on the Eurosystem’s credit quality steps( ECB Rating Scale):