Translate A Credit Into PD, LGD, And EAD
Explain expected loss as separate probability, severity, and exposure questions.
Good expected-loss work says whether the problem is likelihood, severity, or exposure. The idea PD, LGD, and EAD make credit risk analyzable because they split one vague question into three mechanisms. Probability of default asks how likely the borrower is to miss obligations. Loss given default asks how much is lost after recovery. Exposure at default asks how much will be outstanding when default occurs. Why it works Each driver responds to different evidence. Weak liquidity, declining margins, and covenant pressure usually move PD. Specialized collateral, second-lien position, legal friction, or slow liquidation usually move LGD. Undrawn commitments and borrower…
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