Loan commitments and financial guarantees

Learning objectives

• Determine the period of exposure for revolving credit facilities (exception) and measure the expected credit loss on a loan commitment or a financial guarantee contract.L3, L4
• Calculate, from the data of a case, the amounts relating to loan commitments and financial guarantee contracts.L3, L4
• Support in writing, from the facts of the case, the judgement made on loan commitments and financial guarantee contracts.L3, L4

Normative references

• IFRS 9 §5.5.20Exception for some instruments that include both a loan and an undrawn commitment component (revolving facilities such as credit cards and overdrafts): when the entity's contractual ability to demand repayment does not limit its exposure to the contractual notice period, expected credit losses are measured over the period during which the entity is exposed to credit risk that would not be mitigated by credit risk management actions; outside this exception, the period is the contractual period.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

1 question

• Theta SA grants a customer a revolving credit facility (credit card type). Theta's ability to demand repayment does not limit its exposure to credit risk to the notice period. According to the case, the period of exposure to credit risk not mitigated by credit risk management actions is {exposure_period}. Expected exposure at default: {exposure}; probability of default over that period: {pd}; loss given default: {lgd}. Case convention: expected loss = exposure × probability of default × loss given default, without discounting. Calculate the expected credit loss of the facility.L3