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- Period of exposure that limits the period over which possible defaults are considered and thus affects the determination of other components in the calculation of ECLs.
- Exposure at Default that is linked to the question of how loan exposures are expected to change over time and . This value is crucial to for an unbiased measurement of ECLs.
In addition, the calculation of exposure at default can be split into two sub-groups:
- Exposure for on-balance financial assets, for example loans, money market or other debit debt instruments. For on-balance items, the contractual payment schedule, the payment behaviour such as early repayment or prolongation will have an impact on the exposure for different periods.
- Exposure for off-balance financial assets including the undrawn portion of revolving credits and commitment. For an off-balance item, the credit conversion factor has a significant impact on the estimated exposure at default.
The following components are provided for on-balance sheet items as well as for a simplified approach. Components for off-balance sheet items and more complex requirements are available on request.
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This component calculates the EAD for different time periods over the lifetime of a financial instrument, e.g. EAD in 3 months, 6 months, 1 year, 2 years etc. This approach takes into account that for a financial instrument with a regular repayment plan, e.g. annuity, the EAD for future periods will be different to the current book value due to repayments.
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On the basis of the cash flow plan, the EAD for different periods in the future is calculated using the amortised cost and the adjustment of 3 - months overdue which may occur before default.
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