Basel Credit Risk Models - EAD PD LGD EL - under Regulatory Reporting - Definition #ChartAcc

Tuesday, April 8, 2014

ChartAcc.com - Basel is the machine that has generated terms like EAD, PD, LGD and EL explained hereunder. 

Banks are required to hold reserves against Expected Credit Losses (EL) that are considered to be cost of doing business.

Following formula is applied for EL: 

Expected Loss (EL) = PD x LGD x EAD 

Where
  • Probability of default (PD) is the probability of default of a borrower.
  • Loss given default (LGD) is the %age magnitude of likely loss on the exposure of the exposure.
  • Exposure at default (EAD) is the amount to which the bank was exposed to the borrower at the time of default.

For more on Basel click here.

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