And the asset classes included in this exercise only comprise, on average, 42 per cent of the true exposure at default of each participating bank.

Under the ‘Advanced’ Approach, credit institutions may use their own estimates for losses given default and their exposure at default.

Exposure at default, in finance (Basel II)

Exposure at default (EAD)

Exposure at default (EAD) "amount to which the bank was exposed to the borrower at the time of default, measured in currency" (This page.)

Exposure at default (EAD) is a parameter used in the calculation of economic capital or regulatory capital under Basel II for a banking institution.

Theoretically, LGD is calculated in different ways, but the most popular is 'Gross' LGD, where total losses are divided by exposure at default (EAD).

As we’ve written before, several attempts to compare UK banks’ assumptions around probability of default (PD), LGD, and exposure at default (EOD) have demonstrated just how wildly they can vary.

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).

We considered that a more reasonable approach would be to use a methodology similar to the advance internal rating approach incorporated in the Basel II Accord in which expected credit losses are determined by using the expected default rate, the loss given the default, and the exposure at default.