Expected loss (EL)

Expected loss (EL) is the average credit loss a lender expects on a loan or a book, calculated as probability of default (PD) × loss given default (LGD) × exposure at default (EAD). It is a cost of lending and is priced into the rate.

Example

For illustration, a loan has an EAD of 10,000, a PD of 2% and an LGD of 45%. Expected loss is 0.02 × 0.45 × 10,000 = 90. This is an average estimate, not a claim about the loss on that particular loan.

Calculating expected loss from a loan to a book

For each loan, the calculation uses its PD, LGD and EAD. Apply it to each loan in a segment, then add those estimates to get the segment total.

For a whole book, add the loan-level estimates or the segment totals. The result reflects the inputs supplied for the loans or segments.

Using expected loss in lending decisions

Expected loss is a cost of lending and is priced into the rate. The calculation itself does not specify a provision amount or a credit limit.

Unexpected loss is the variation around expected loss, and capital covers it. In a stress test, PD and LGD are raised to see how expected loss would move in a downturn.

Questions we get asked

The free expected loss calculator calculates expected loss by segment and for a book, and shows how a PD and LGD stress changes the result.