EL (Expected Loss)
Corporate Credit Analysis glossary · Credit Metrics & Debt Schedule Modeling
Definition
The probability-weighted expected loss on an exposure; EL = PD × LGD × EAD. The foundational credit-loss formula in both regulatory capital and pricing.
EL (Expected Loss) in plain English
Expected Loss is a lender's honest average guess of how much money it will lose on a loan, blending three things: how likely default is, how bad the loss would be if it happens, and how much is at stake. The formula EL = PD × LGD × EAD multiplies the probability of default (PD), the loss given default (LGD — the fraction you DON'T recover), and the exposure at default (EAD — the dollars at risk). It's the same logic as an insurance company pricing policies: chance of a claim, times size of the claim, times number of policies. Banks bake this expected loss into the interest rate they charge and the safety capital they hold, so a riskier borrower rightly pays more.
Also called: Expected Loss
Learn these first
Related Corporate Credit Analysis terms
Corporate Credit Analysis practice questions · Corporate Credit Analysis flashcards · Corporate Credit Analysis study guide