4.1. Direct credit substitutes4.1. Direct credit substitutes

4.1. Direct credit substitutes

Any irrevocable off-balance sheet obligations that carry the same credit risk as a direct extension of credit, such as an undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation, or an undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party, constitutes a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty or the party on whom a potential claim is acquired).

Include:

• potential credit exposures arising from the issue of guarantees and credit derivatives (credit derivatives where protection is sold);
• confirmation of letters of credit;
• issue of standby letters of credit serving as financial guarantees for loans, securities and any other financial liabilities; and
• bills endorsed under bill endorsement lines (but are not accepted by, or have the prior endorsement of, an ADI).