BTL 902 - Key Credit Risk Metrics

 

The Banking Tutor’s Lessons

BTL 902                                                                                24-05-2026

Key Credit Risk Metrics

The following 5 Credit Risk Metrics are the building blocks of Credit Risk and they work together.

Probability of Default (PD) – The likelihood that a borrower will fail to repay the loan within the specified period. It tells un that “default may happen”.

Loss Given Default (LGD) - How much the lender expects to lose after a borrower defaults, once recoveries/collateral are considered. It tells us “How much we lose”.

Exposure at Default (EAD) – The total amount the Bank is to when default happens. It tells us “How big the exposure is”.

Expected Credit Loss (ECL) – The forward-looking estimate of potential losses from credit risk.  It combines all the three (PD, LGD and EAD) into expected loss.

Portfolio at Risk (PAR) – The percentage of the loan portfolio with overdue payments beyond a defined threshold (e.g. PAR30, PAR90). It shows current portfolio stress.

Sekhar Pariti

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