What is included in exposure at default?
Exposure at default (EAD) is the predicted amount of loss a bank may be exposed to when a debtor defaults on a loan. Exposure at default, loss given default, and the probability of default is used to calculate the credit risk capital of financial institutions.
How is EAD calculated?
The EAD is obtained by adding the risk already drawn on the operation to a percentage of undrawn risk. This percentage is calculated using the CCF. It is defined as the percentage of the undrawn balance that is expected to be used before default occurs. Thus the EAD is estimated by calculating this conversion factor.
What is the difference between EAD and LGD?
The main difference between LGD and EAD is that LGD takes into consideration any recovery on the default. For example, if a borrower defaults on their remaining car loan, the EAD is the amount of the loan left they defaulted on.
How do you prevent exposure at default?
Under certain conditions, the on-balance sheet netting of loans and deposits of a bank to a corporate counterparty is allowed to reduce the estimate of Exposure at Default.
How do you calculate expected exposure?
It is calculated by evaluating existing trades done against the possible market prices in future during the lifetime of transactions. It can be called sensitivity of risk with respect to market prices. The calculated expected maximum exposure value is not to be confused with the maximum credit exposure possible.
How is credit risk exposure calculated?
The credit risk is calculated in the following manner:
- Estimate the FICO score of the consumer. The FICO score is a quantifying measure which helps in determining the creditworthiness of an individual as well as his repayment history.
- Calculate the debt-to-income ratio.
- Factor in the potential debt of the borrower.
What is RWA and EAD?
Under A-IRB banks are supposed to use their own quantitative models to estimate PD (probability of default), EAD (exposure at default), LGD (loss given default) and other parameters required for calculating the RWA (risk-weighted asset).
What is PD model?
A Probability of Default Model (PD Model) is any formal quantification framework that enables the calculation of a Probability of Default risk measure on the basis of quantitative and qualitative information.
What is credit exposure formula?
It is a calculated risk to doing business as a bank. For example, if a bank has made a number of short-term and long-term loans totaling $100 million to a company, its credit exposure to that business is $100 million.
What is maximum potential exposure?
Potential future exposure (PFE) is the maximum expected credit exposure over a specified period of time calculated at some level of confidence (i.e. at a given quantile). The calculated expected maximum exposure value is not to be confused with the maximum credit exposure possible.
What is RWA formula?
The capital adequacy ratio is calculated as eligible capital divided by risk-weighted assets. Risk-weighted assets, or RWA, are used to link the minimum amount of capital that banks must have, with the risk profile of the bank’s lending activities (and other assets).