Eurosystem credit assessment framework (ECAF)
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 three 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 three sources:
- external credit assessment institutions (ECAIs)
- national central banks’ in-house credit assessment systems (ICASs)
- counterparties’ internal ratings-based (IRB) systems
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.
|Credit assessment source||Credit assessment system / provider||Coverage|
|ECAI||DBRS Morningstar||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||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|
Credit quality assessment
Minimum credit quality requirements
Last updated: 31 July 2020
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. Probabilities of default of up to 1.00% and 1.50% correspond to credit quality steps 4 and 5, respectively.
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 (Article 82 of Guideline ECB/2014/60, as amended).
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; Article 82 of Guideline ECB/2014/60, as amended). 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.
On 7 April 2020 the Governing Council adopted temporary measures to mitigate the effect on collateral availability of possible rating downgrades resulting from the economic fallout from the coronavirus (COVID-19) pandemic (link). The Governing Council decided to maintain the eligibility of marketable assets, and that of the issuers of such assets, that fulfilled minimum credit quality requirements on 7 April 2020 in the event of deterioration in credit ratings decided by ECAIs, as long as the ratings remain above a certain credit quality level. In particular:
- marketable assets and issuers of these assets that met the minimum credit quality requirements for collateral eligibility on 7 April 2020 (credit quality step 3 for all assets, except ABSs) will continue to be eligible in the event of rating downgrades as long as their rating remains at or above credit quality step 5;
- ABSs eligible on 7 April 2020 will remain eligible as collateral as long as their rating remains at or above credit quality step 4.
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|
|Short-term||DBRS Morningstar||R-1H, R-1M||R-1L, R-2H, R-2M, R2-L, R-3|
|FitchRatings||F1+||F1, F2, F3|
|Standard & Poor’s||A-1+, A-1||A-2, A-3|
|Standard & Poor’s||AAA/AA+/AA/AA-||A+/A/A-||BBB+/BBB/BBB-||BB+||BB|
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 and IRBs) 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 and IRBs on the compilation of the static pool:
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.
General acceptance criteria for ECAIs
- ECAIs must be registered 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.Minimum coverage requirements for ECAIs in the ECAF Q&As on the acceptance of credit rating agencies as external credit assessment institutions under the Eurosystem credit assessment framework
Operational criteria on covered bond programmes rated by ECAIs
ECAIs must comply with specific operational criteria. In relation to covered bonds, with effect from 1 July 2017, ECAIs must publish new issue reports and quarterly surveillance reports for all rated covered bonds in order to meet the high credit standards of the ECAF (Article 59 and Article 120 of Guideline ECB/2014/60, as amended). For further clarification on these requirements:Q&As on the Eurosystem’s disclosure requirements for covered bond ratings
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:
- Deutsche Bundesbank;
- Central Bank of Ireland;
- Banco de España;
- Banque de France;
- Banca d’Italia;
- Oesterreichische Nationalbank;
- Banco de Portugal;
- Banka Slovenije.
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.