1. What Is Expected Loss?

Expected Loss (EL) is a risk metric used in credit risk management to estimate the potential loss a financial institution might incur from a credit exposure. It represents the average loss expected over a given time period.

2. How Does The Calculator Work?

The calculator uses the Expected Loss formula:

Where:

• \( PD \) — Probability of Default (%)
• \( LGD \) — Loss Given Default (%)
• \( EAD \) — Exposure at Default (currency)

Explanation: The formula multiplies the probability that a borrower will default by the percentage of exposure that will be lost if default occurs, and then by the total exposure amount.

3. Importance Of Expected Loss Calculation

Details: Expected Loss calculation is crucial for banks and financial institutions to determine capital requirements, set loan loss provisions, price credit products appropriately, and manage overall credit risk exposure.

4. Using The Calculator

Tips: Enter PD as a percentage (0-100%), LGD as a percentage (0-100%), and EAD in currency units. All values must be valid and non-negative.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between Expected Loss and Unexpected Loss?
A: Expected Loss is the average loss anticipated over time, while Unexpected Loss represents the volatility around this average and requires capital reserves.

Q2: How is PD typically estimated?
A: PD can be estimated using credit scoring models, historical default rates, credit ratings, or statistical models based on borrower characteristics.

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

Q4: Is EAD the same as the current exposure?
A: Not always. EAD includes both current exposure and potential future exposure from undrawn credit commitments.

Q5: How is Expected Loss used in regulatory capital?
A: Under Basel frameworks, Expected Loss is covered by provisions, while Unexpected Loss is covered by capital requirements.