Exposure at Default

The Exposure At Default (EAD) measures the expected total amount outstanding for a facility, given that it defaults. As such it is one of the key characters within the credit risk domain, both in the context of loan-loss provisioning (IFRS9) as well as for the purpose of determining the minimal capital requirements (IRB).

EAD may seem a fairly basic topic. This is illustrated by the fact it is one of the few cases where, sometimes, one can suffice with linear models of the following type: EAD = current outstanding. However, depending on the precise details of the underlying contracts (and context, e.g. does it concern an IRB or IFRS9 model), one might require more complex solutions. This complexity can arise due to a variety of topics, ranging from credit conversion of off-balance sheet exposure (both committed and uncommitted), the treatment of additional drawings, PiT adjustments, to accounting for multi-year amortization schemes and/or early pre-payment. Hence, in reality one finds that the road to a successful EAD-model is paved with subtleties.

At RiskQuest we navigate our way through these subtleties by leveraging on our in-depth knowledge of the underlying product characteristics, regulations and our extensive experience. Over the past years, RiskQuest has been helping out financial institutions in a variety of ways, ranging from model validation, model design, to advising on methodological issues or regulatory compliance. Past projects include validation of a large corporate IRB model, and creating an IFRS compliant credit risk model amongst other projects. Whether it concerns a homogeneous portfolio of Dutch retail mortgages, or a low-default portfolio of corporate credits involving an extremely diverse set of products, we happily pick up the challenge!