- Exposure at default (EAD)
Exposure at default (EAD) is a parameter used in the calculation of
economic capitalor regulatory capitalunder Basel IIfor a banking institution. This is an attribute of any exposure on bank's client.
In general EAD can be seen as an estimation of the extent to which a bank may be exposed to a counterparty in the event of, and at the time of, that counterparty’s default. It is a measure of potential exposure (in currency) as calculated by a Basel Credit Risk Model for the period of 1 year or until maturity whichever is sooner. Based on Basel Guidelines Exposure at Default (EAD) for loan commitments measures the amount of the facility that is likely to be drawn if a default occurs [ [http://www.bis.org/bcbs/cp3ov.pdf Overview of the New Basel Capital Accord] BIS Consultative Document, April 2003] .
Basel IIa bank needs to provide an estimate of the exposure amount for each transaction, commonly referred to as Exposure at Default (EAD), in banks’ internal systems. All these loss estimates should seek to fully capture the risks of an underlying exposure.
EAD is mainly used in banking businesses.
How EAD is calculated
Calculation of EAD is different under foundation and advanced approach. While under foundation approach (
F-IRB) calculation of EAD is guided by the regulators, under the advanced approach ( A-IRB) banks enjoy greater flexibility on how they would like to calculate EAD.
Calculating EAD under foundation approach
F-IRBEAD is calculated taking account of the underlying asset, forward valuation, facility type and commitment details. This value does not take account of guarantees, collateral or security (i.e. ignores Credit Risk Mitigation Techniques with the exception of on-balance sheet netting where the effect of netting is included in Exposure At Default). For on-balance sheet transactions, EAD is identical to the nominal amount of exposure. On-balance sheet netting of loans and deposits of a bank to a corporate counterparty is permitted to reduce the estimate of EAD under certain conditions. For off-balance sheet items, there are two broad types which the IRB approach needs to address: transactions with uncertain future drawdown, such as commitments and revolving credits, and OTC foreign exchange, interest rate and equity derivative contracts [http://www.basel-ii-risk.com/Basel-II/Basel-II-Glossary/Exposure-at-Default.htm Financial Risk Management Regulation Information] ] .
Calculating EAD under advanced approach
A-IRB, the bank itself determines the appropriate EAD to be applied to each exposure. A bank using internal EAD estimates for capital purposes might be able to differentiate EAD values on the basis of a wider set of transaction characteristics (e.g. product type) as well as borrower characteristics. These values would be expected to represent a conservative view of long-run averages, although banks would be free to use more conservative estimates. A bank wishing to use its own estimates of EAD will need to demonstrate to its supervisor that it can meet additional minimum requirements pertinent to the integrity and reliability of these estimates. All estimates of EAD should be calculated net of any specific provisions a bank may have raised against an exposure.
In terms of assigning estimates of EAD to broad EAD classifications, banks may use either internal or external data sources. Given the perceived current data limitations in respect of EAD (in particular external sources) a minimum data requirement of 7 years has been set.
The importance of EAD
For a risk weight derived from the IRB framework to be transformed into a risk weighted asset, it needs to be attached to an exposure amount. Any error in EAD calculation will directly effect the risk weighted asset and thereby affect the
*http://www.bis.org/publ/bcbsca.htm Basel II: Revised international capital framework (BCBS)
*http://www.bis.org/publ/bcbs107.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS)
*http://www.bis.org/publ/bcbs118.htm Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework (BCBS) (November 2005 Revision)
*http://www.bis.org/publ/bcbs128.pdf Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, Comprehensive Version (BCBS) (June 2006 Revision)
Wikimedia Foundation. 2010.
Look at other dictionaries:
Exposure At Default - EAD — A total value that a bank is exposed to at the time of default. Each underlying exposure that a bank has is given an EAD value and is identified within the bank s internal system. Using the internal ratings board (IRB) approach, financial… … Investment dictionary
Exposure at default — (EAD) параметр риска, использующийся для вычисления экономического или регулятивного капитала банковских организаций по методике Базель II. Означает общие кредитные потери в момент невыполнения кредитных обязательств (дефолта). Способ… … Википедия
Exposure at Default — EAD Posizioni in o fuori bilancio, definite come l esposizione attesa della facility al momento del default del debitore. Sono legittimate a stimare l Exposure at default solo le banche che soddisfano i requisiti per l adozione dell approccio … Glossario di economia e finanza
EAD — or EAD may be: * Elite Athlete with a Disability, in athletics * Employment Authorization Document, in U.S. employment * Encoded Archival Description, for searching archived information * Equivalent air depth, in diving with nitrox * EAD socket… … Wikipedia
EAD — steht für: Encoded Archival Description, ein XML Format zur Beschreibung von Archivalien Ethernet Anschlussdose Evangelische Akademien in Deutschland e.V. Evangelische Allianz Deutschland Evangelischer Ausländerdienst, ein christlicher Verein… … Deutsch Wikipedia
EAD — Cette page d’homonymie répertorie les différents sujets et articles partageant un même nom. Sigles d’une seule lettre Sigles de deux lettres > Sigles de trois lettres Sigles de quatre lettres … Wikipédia en Français
EAD — Encoded Archival Description (Computing » Security) *** Employment Authorization Document (Business » Positions) ** Exposure At Default (Business » Stock Exchange) * Entertainment Analysis And Development (Computing » Telecom) * Echelons Above… … Abbreviations dictionary
Loss given default — Basel II Bank for International Settlements Basel Accords Basel I Basel II Background Banking Monetary policy Central bank Risk … Wikipedia
Loss given default (LGD) — Loss Given Default or LGD is a common parameter in Risk Models and also a parameter used in the calculation of Economic Capital or Regulatory Capital under Basel II for a banking institution. This is an attribute of any exposure on bank s… … Wikipedia
Loss Given Default — (LGD) est un des trois indicateurs de risque de crédit de la réglementation Bâle II correspondant à la perte en cas de défaut. Voir aussi EAD (Exposure At Default) PD (Probability Of Default) RWA (Risk Weighted Assets) Portail de la finance … Wikipédia en Français