UL (Unexpected Loss)
Corporate Credit Analysis glossary · Corporate Credit Analysis
Definition
The standard deviation of loss around the expected loss; under simplifying assumptions, UL ≈ √(PD(1 - PD)) · LGD · EAD. Foundational in credit economic capital.
UL (Unexpected Loss) in plain English
Lenders expect to lose a little on loans on average — that's baked in. Unexpected Loss is about the SURPRISE: how much worse than average a bad year could realistically get, since real losses swing around that average. It's essentially the "typical size of the swing" (the standard deviation) in losses, and it's what banks hold extra cushion capital against — because you can budget for the average, but you need reserves for the shock. The rough formula UL ≈ √(PD(1-PD)) · LGD · EAD just combines how uncertain it is that the borrower defaults (PD = probability of default) with how much you'd lose if they do (LGD, the fraction not recovered) and how much you'd have at stake (EAD, the amount owed at default).
Also called: Unexpected Loss
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