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.
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:
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||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|
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).
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.
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||R-1H, R-1M||R-1L, R-2H, R-2M, R2-L|
|Standard & Poor’s||A-1+, A-1||A-2|
|Standard & Poor’s||AAA/AA+/AA/AA-||A+/A/A-||BBB+/BBB/BBB-|
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: 20 December 2016
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.
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.
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/2014/31, as amended). For further clarification on these requirements:
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:
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.
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.
The Eurosystem currently accepts the following credit assessment systems as RTs:
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|
|3||A1.2 to A2.2|
RTs are subject to the ECAF performance monitoring process.