Expected loss calculator (PD x LGD x EAD)
Turn a probability of default, a loss severity and an exposure into an expected loss figure for a loan or a segment.
- Expected loss
- $8,000
- Expected loss rate
- 0.8%
- Loss if the borrower defaults
- $400,000
- Expected recovery if it defaults
- $600,000
How to use it
Expected loss = PD x LGD x EAD
- PD is the probability the borrower defaults over the horizon you care about, usually one year; take it from your risk grade or scorecard mapping.
- LGD is the share of the exposure you expect to lose after collateral and recoveries; EAD is the balance at default, including expected draws on undrawn lines.
- One-year expected loss is not the same as a lifetime CECL allowance, which looks over the remaining life of the loan.
For illustration only. Use your institution's own policy definitions.
