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Expected Credit Loss (ECL) (Example (Question (•ZahidiBank holds a $500…
Expected Credit Loss (ECL)
Probability of Default (PD)
A likelihood of a credit exposure not paid and which turns non-performing, which is expressed in percentage
Loss at given default
The fraction of exposure which cannot be recovered, which is expressed in percentage of unsecured exposure against total exposure
Exposure at Default (EAD)
Total credit exposure granted to a counterparty at the time of default
Example
Question
•ZahidiBank holds a $500 million BBA portfolio with 15 years tenor.
•PD of the portfolio = 10%
•BBA defaulted after 5 years
•Exposure at given default (EAGD) = $400m
•Collateral $300m
Answer
•Loss rate given default = (EAGD –collateral)/EAGD
= ($400m -$300m)/$400m = ($100/$400) x 100% = 25%
•EL= PD x EAGD x LGD
•EL = 0.1 x $400m x 0.25 = $10 million
•Bank will put aside $10 million for NPF provision