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Eurosystem credit assessment framework (ECAF)

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Objective: meeting high credit standards

The Eurosystem credit assessment framework (ECAF) mitigates the credit risk of collateral used in monetary policy operations, together with appropriate valuation and risk control measures. The ECAF defines the procedures, rules and techniques which ensure that the Eurosystem requirement of high credit standards for all eligible assets is met.

In addition, the Eurosystem applies greater valuation haircuts to eligible (i.e. high quality) assets which are nevertheless of relatively lower credit quality according to the ECAF, aiming at risk equivalence across all eligible assets.

Drawing on four sources

To assess the credit quality of eligible assets, the Eurosystem takes into account information ‒ ratings or probabilities of default ‒ from credit assessment systems belonging to one of four sources:

  • external credit assessment institutions (ECAIs);
  • national central banks’ in-house credit assessment systems (ICASs);
  • counterparties’ internal ratings-based (IRB) systems;
  • third-party providers’ rating tools (RTs).

It is for the Eurosystem to determine whether an issue, issuer, debtor or guarantor fulfils the Eurosystem’s credit quality requirements on the basis of any information that it may consider relevant for ensuring the adequate risk protection of the Eurosystem.

List of credit assessment systems accepted by the Eurosystem

Credit assessment source Credit assessment system / provider Coverage
ECAI DBRS Eligible assets / issuers / debtors / guarantors from EEA or non-EEA G10 countries
FitchRatings Eligible assets / issuers / debtors / guarantors from EEA or non-EEA G10 countries
Moody’s Eligible assets / issuers / debtors / guarantors from EEA or non-EEA G10 countries
Standard & Poor’s Eligible assets / issuers / debtors / guarantors from EEA or non-EEA G10 countries
ICAS Nationale Bank van België/Banque Nationale de Belgique Belgian non-financial corporations
Deutsche Bundesbank German non-financial corporations
Central Bank of Ireland Mortgage-backed promissory notes issued by Irish credit institutions
Banco de España Spanish non-financial corporations
Banque de France French non-financial corporations
Banca d’Italia Italian non-financial corporations
Oesterreichische Nationalbank Austrian non-financial corporations
Banco de Portugal Portuguese non-financial corporations
Banka Slovenije Slovenian non-financial corporations
RT Cerved Group Italian non-financial corporations

Credit quality assessment

Minimum credit quality requirements

The Eurosystem considers a probability of default over a one-year horizon of up to 0.10% as equivalent to a credit assessment of credit quality step 2 on the Eurosystem’s harmonised rating scale, subject to regular review. A probability of default of up to 0.40% is equivalent to step 3.

All assets accepted by the Eurosystem as eligible collateral must meet the minimum requirement of a credit assessment of credit quality step 3 on the Eurosystem’s harmonised rating scale (General framework).

Specific requirements apply to asset-backed securities (ABS) and retail mortgage-backed debt instruments (RMBDs).

  • ABS must meet the minimum requirement of credit quality step 2 on the Eurosystem’s harmonised rating scale. ABS need to have at least two credit assessments meeting this requirement from any accepted ECAI for the issue (the “second best” rule). However, ABS with a second-best rating of at least credit quality step 3 are also eligible for use as collateral if they fulfil certain additional requirements (Article 3 of Guideline ECB/2014/31, as amended)
  • RMBDs must have a credit assessment of credit quality step 2 on the Eurosystem’s harmonised rating scale.

It is for the Eurosystem to determine whether an issue, issuer, debtor or guarantor fulfils the Eurosystem’s credit quality requirements on the basis of any information that it may consider relevant for ensuring the adequate risk protection of the Eurosystem. For example, the Eurosystem may reject assets, limit their mobilisation or use as collateral, or apply supplementary haircuts.



Eurosystem’s harmonised rating scale

Accepted credit assessment systems can each use their own individual rating scales and grades. The Eurosystem maps these different grades to a harmonised rating scale in order to make the credit ratings comparable across systems and sources. The table below presents the mapping of the accepted external credit assessment institutions (ECAIs), which is subject to regular review in the ECAF performance monitoring process.

ECAI credit assessment Credit quality steps
1 2 3
Short-term DBRS   R-1H, R-1M R-1L, R-2H, R-2M, R2-L
FitchRatings   F1+, F1 F2
Moody’s   P-1 P-2
Standard & Poor’s   A-1+, A-1 A-2
Long-term DBRS AAA/AAH/AA/AAL AH/A/AL BBBH/BBB/BBBL
FitchRatings AAA/AA+/AA/AA- A+/A/A- BBB+/BBB/BBB-
Moody’s Aaa/Aa1/Aa2/Aa3 A1/A2/A3 Baa1/Baa2/Baa3
Standard & Poor’s AAA/AA+/AA/AA- A+/A/A- BBB+/BBB/BBB-

Performance monitoring of credit assessment systems

All accepted credit assessment systems are subject to due diligence and a performance monitoring process within the ECAF.

All credit assessment systems are required to send the Eurosystem “static pool data”, i.e. a set of data on the universe of the entities (assessed by the credit assessment system) which are eligible for use as collateral in Eurosystem monetary policy operations. Static pool data for credit assessment systems that are mainly used for the credit assessment of non-marketable assets (ICASs, IRBs and RTs) are reported to the respective national central bank (NCB) using a template that the NCB sends to the credit assessment system.

Further clarification in particular for ICASs, IRBs and RTs on the compilation of the static pool: Questions and answers on the compilation of the static pool for performance monitoring in ECAF last update: 18 December 2015

ECAIs

External credit assessment institution source (ECAIs)

External credit assessment institutions (ECAIs) are credit rating agencies whose ratings are considered suitable by the Eurosystem for the specific purpose of its monetary policy operations. They must comply with the general acceptance criteria for ECAIs. The Eurosystem also accepts credit rating agencies as rating tool providers, subject to specific acceptance criteria.

General acceptance criteria for ECAIs

  • ECAIs must be registered or certified by the European Securities and Markets Authority.
  • ECAIs must meet operational criteria and provide relevant coverage so that the ECAF is implemented efficiently. In particular, their credit ratings cannot be used unless information about these ratings is available to the Eurosystem. Information is also needed for comparing and assigning, i.e. mapping, the ratings to the Eurosystem’s credit quality steps and for the purposes of the ECAF performance monitoring process.
  • ECAIs must comply with the minimum coverage requirements in terms of rated assets, rated issuers and rated volume diversified across the eligible asset classes and euro area countries. The minimum coverage requirements are defined by the Eurosystem and give guidance in the context of the ECAF-acceptance procedure on the provision of relevant coverage.

Once an ECAF-acceptance procedure has been initiated, the Eurosystem will also consider all additional information relevant for risk protection and the efficient implementation of the ECAF, including the criteria and rules for monitoring performance. It is for the Eurosystem to decide whether to accept a rating agency as an ECAI for the purposes of the ECAF on the basis of the information provided and its own due diligence assessment. ECAIs are subject to the ECAF performance monitoring process.

ICASs

In-house credit assessment system source (ICASs)

National central banks may decide to develop their own in-house credit assessment system (ICAS). These systems must be validated by the Eurosystem before they can be used for ECAF purposes. Once accepted for ECAF purposes, ICASs are subject to the ECAF performance monitoring process.

The Eurosystem currently accepts eight credit assessment systems as ICASs, operated by the following national central banks respectively:

  • Nationale Bank van België/Banque Nationale de Belgique;
  • Deutsche Bundesbank;
  • Central Bank of Ireland;
  • Banco de España;
  • Banque de France;
  • Banca d’Italia;
  • Oesterreichische Nationalbank;
  • Banco de Portugal;
  • Banka Slovenije.

IRB

Internal ratings-based system source (IRB)

Banks can use an internal ratings-based (IRB) system to calculate the capital requirements for credit risk if the relevant banking supervisor has authorised the IRB system for this purpose in line with the Capital Requirements Regulation.

A Eurosystem counterparty, i.e. a bank, intending to use its authorised IRB system also for ECAF purposes must obtain permission from its home national central bank.

Counterparties using an IRB system for ECAF purposes are subject to the ECAF performance monitoring process.

Rating tools

Third-party provider rating tool (RT) source

The rating tool (RT) source consists of third-party applications that are not operated by a national central bank or a Eurosystem counterparty (i.e. a bank). RTs assess the credit quality of debtors by using primarily quantitative models in a systematic and mechanical manner, which may be complemented by a human expert assessment.

An RT provider wanting to participate in the ECAF must submit a request to the relevant national central bank. A counterparty wishing to use a specific RT that is not yet accepted for ECAF purposes may ask the RT provider to apply for ECAF acceptance, or submit a request to the relevant national central bank. The requests must include the information set down in the acceptance criteria.

The Eurosystem decides whether to accept the RT based on its evaluation of the RT’s compliance with the acceptance criteria.

Acceptance criteria for third-party rating tools within the Eurosystem credit assessment framework, May 2015

The Eurosystem currently accepts the following credit assessment systems as RTs:

  • Cerved Group

The Eurosystem maps the different grades of accepted RTs’ rating scales to its harmonised rating scale in order to make them comparable.

Credit quality steps Cerved Group
1 -
2 A1.1
3 A1.2 to A2.2

RTs are subject to the ECAF performance monitoring process.