• Exposure to default (EAD) is the projected amount of loss that a bank may incur when a debtor defaults on a loan.
  • EAD is dynamic; as the borrower’s risk and debt profile change, lenders often overestimate exposure risk.
  • Exposure to default, loss at default and probability of default are used to calculate the total credit risk capital of financial institutions.
  • EAD is important for assessing financial risk, maintaining financial stability and preventing cascading defaults due to excessive leverage.
  • As a result of the 2008 global financial crisis, legislation and public policy are trying to monitor and control the ability of the banking industry to cope with stress.