Expected Credit Loss Calculation

Expected Credit Loss Formula:

\[ ECL = \sum [PD \times LGD \times EAD \times \text{Discount Factor}] \]

Probability of Default (PD):

Loss Given Default (LGD):

Exposure at Default (EAD):

currency

Discount Factor:

dimensionless

Expected Credit Loss (ECL):

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1. What is Expected Credit Loss?

Expected Credit Loss (ECL) is a forward-looking impairment model required under IFRS 9 accounting standards. It represents the present value of all cash shortfalls over the expected life of financial instruments, considering probability-weighted outcomes.

2. How Does the Calculator Work?

The calculator uses the ECL formula:

\[ ECL = \sum [PD \times LGD \times EAD \times \text{Discount Factor}] \]

Where:

\( PD \) — Probability of Default (%)
\( LGD \) — Loss Given Default (%)
\( EAD \) — Exposure at Default (currency)
\( \text{Discount Factor} \) — Present value adjustment factor

Explanation: The formula calculates the expected loss by multiplying the probability of default, the loss rate if default occurs, the exposure amount, and discounting it to present value.

3. Importance of ECL Calculation

Details: ECL calculation is crucial for financial institutions to comply with IFRS 9 requirements, assess credit risk, determine loan loss provisions, and maintain adequate capital reserves.

4. Using the Calculator

Tips: Enter PD and LGD as percentages (0-100%), EAD in currency units, and Discount Factor as a decimal between 0 and 1. All values must be valid and within specified ranges.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between ECL and incurred loss models?
A: ECL is forward-looking and recognizes expected losses earlier, while incurred loss models only recognize losses after they occur.

Q2: How is PD typically estimated?
A: PD can be estimated using historical default rates, credit ratings, statistical models, or external credit assessment institutions.

Q3: What factors affect LGD?
A: LGD depends on collateral quality, recovery rates, seniority of the claim, and economic conditions during default.

Q4: When should ECL be calculated?
A: ECL should be calculated at initial recognition and updated at each reporting date to reflect changes in credit risk.

Q5: Are there different ECL approaches for different stages?
A: Yes, IFRS 9 defines three stages with different ECL measurement approaches based on credit deterioration.