PD, LGD, EAD Desk Cards
Recall the difference between probability, severity, and exposure drivers in expected loss.
Likelihood What question does PD answer? How likely is default over the horizon? Use borrower performance, liquidity, leverage, covenants, behavior, and macro conditions. Severity What question does LGD answer? If default happens, what share of exposure is lost after recovery? Use collateral, seniority, guarantees, legal costs, timing, and workout history. Do not blur Collateral appraisal worsens. Which driver moves first? Collateral usually affects severity before likelihood. Committee line The revolver is only 50 percent drawn, so exposure is clearly low. Borrower has liquidity stress and unused availability. Your line Current utilization is not EAD. We need a draw-at-default assumption because…
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