What is expected loss?

This is a calculation used by lending institutions to help them understand losses they may incur as a result of lending to a borrower that may default.

Where have you heard about expected loss?

This calculation is mainly only used by banks and other financial institutions that lend money. It's an important part of their risk calculations.

What you need to know about expected loss.

The calculation for expected loss is:

probability of default x loss given default x exposure at default

Probability of default is the likelihood that a loan will not be repaid and must be calculated for each borrower, using the bank's own internal ratings or those of an external agency such as Moody's or Standard & Poor's. Loss given default is the fractional loss due to default, and exposure at default is is the amount that the borrower owes to the lending institution at the time of default.

Find out more about expected loss.

To understand expected loss, it helps to be familiar with credit risk. Find out more with our guide.