Ead Calculator

In the world of banking, risk management is critical to ensure financial stability and regulatory compliance. One of the core components of credit risk assessment is EAD — Exposure at Default. Financial institutions use this metric to estimate the amount of money at risk if a borrower defaults.

📘 What Is EAD (Exposure at Default)?

Exposure at Default (EAD) refers to the total value a lender is exposed to when a borrower defaults on a loan or credit obligation. It includes:

• The outstanding balance of the loan
• Any accrued interest
• Possibly, unused credit limits (in case of credit cards or revolving credit)

EAD is a fundamental component of the credit risk formula under the Basel II/III framework:

Expected Loss (EL) = EAD × PD × LGD

Where:

• PD = Probability of Default
• LGD = Loss Given Default

🧮 EAD Calculator: What It Does

Our EAD Calculator helps you estimate how much money a financial institution is at risk of losing if a borrower defaults, considering:

• Loan type (term loan vs. credit line)
• Outstanding balance
• Credit conversion factors (CCF)
• Committed vs. uncommitted amounts

📲 How to Use the EAD Calculator

Step-by-Step:

1. Input Loan Amount – Total credit facility or line of credit.
2. Input Outstanding Balance – The amount currently drawn.
3. Input Undrawn Amount – The remaining available balance.
4. Enter Credit Conversion Factor (CCF) – Usually between 0% and 100%.
5. Click "Calculate"

Output:

• Estimated EAD = Outstanding Balance + (Undrawn Amount × CCF)

📐 EAD Calculation Formula

Formula for EAD:

EAD = Drawn Amount + (Undrawn Amount × CCF)

Where:

• Drawn Amount = Currently borrowed amount
• Undrawn Amount = Committed – Drawn
• CCF (Credit Conversion Factor) = % of unused credit likely to be used before default

🧾 Example Calculations

🔹 Example 1: Simple Term Loan

• Loan = $100,000
• Drawn = $100,000
• Undrawn = $0
• CCF = 0%

EAD = $100,000 + (0 × 0%) = $100,000

🔹 Example 2: Credit Line

• Credit limit = $200,000
• Drawn = $120,000
• Undrawn = $80,000
• CCF = 50%

EAD = 120,000 + (80,000 × 0.5) = 120,000 + 40,000 = $160,000

This means if the borrower defaults, the bank is at risk of losing $160,000.

🏦 Where Is EAD Used?

EAD is used in:

• Internal Ratings-Based (IRB) models under Basel II/III
• Expected credit loss models (IFRS 9 / CECL)
• Loan loss provisions
• Stress testing
• Capital requirement calculations

📊 Importance of CCF in EAD

Credit Conversion Factor (CCF) reflects the probability that unused credit will be drawn before default. Regulators typically assign:

🧠 Why EAD Matters

1. Risk Management – Helps banks estimate worst-case exposure scenarios.
2. Regulatory Compliance – Required by Basel II/III and IFRS 9 standards.
3. Capital Allocation – Determines how much capital needs to be set aside.
4. Portfolio Monitoring – Tracks changes in exposure over time.

🔢 Related Risk Terms

• PD (Probability of Default): Likelihood the borrower will default.
• LGD (Loss Given Default): Proportion of EAD that won't be recovered.
• EL (Expected Loss): The product of EAD × PD × LGD.
• RWA (Risk-Weighted Assets): Asset amount adjusted for credit risk.

✅ Benefits of Using the EAD Calculator

• 🔐 Enhances credit risk accuracy
• 📉 Minimizes underestimation of risk exposure
• 📊 Useful for stress testing scenarios
• 🧾 Complies with Basel requirements
• 📈 Assists in capital planning

❓20 Frequently Asked Questions (FAQs)

1. What is EAD in banking?
   EAD stands for Exposure at Default — the total amount at risk when a borrower defaults.
2. How is EAD different from loan amount?
   EAD may include both drawn and a portion of undrawn commitments, not just the current loan balance.
3. What does CCF mean in EAD calculation?
   Credit Conversion Factor (CCF) estimates how much of the unused credit will be drawn before default.
4. What is the EAD formula?
   EAD = Drawn Amount + (Undrawn Amount × CCF)
5. Where is EAD used?
   In risk management, capital adequacy, and expected loss calculations under Basel.
6. How accurate is the calculator?
   Very accurate for fixed CCF models; adjustments may be needed for dynamic portfolios.
7. Can EAD be zero?
   Only if both drawn and undrawn amounts are zero, which is rare in credit facilities.
8. Does EAD include interest?
   It can, especially if interest is accrued and unpaid at the time of default.
9. How does EAD affect capital requirements?
   Higher EAD increases risk-weighted assets, thus raising capital needed.
10. Can EAD be higher than the loan amount?
    Yes, if you factor in accrued interest or projected utilization of credit lines.
11. Is EAD relevant for mortgages?
    Mostly for revolving products; mortgages are usually 100% drawn, so EAD = balance.
12. What are IRB approaches?
    Internal Ratings-Based models for banks to calculate capital based on their risk assessments.
13. What are typical CCF values?
    Between 0% (term loans) and 90% (credit cards), depending on product type.
14. How do you estimate CCF?
    Based on historical usage data, or using regulatory guidelines.
15. What’s the difference between EAD and LGD?
    EAD is the exposure at default; LGD is the loss from that exposure.
16. Can I use this calculator for IFRS 9?
    Yes, EAD is a key input in expected credit loss models like IFRS 9 and CECL.
17. Do banks calculate EAD monthly?
    Yes, especially in dynamic risk monitoring and stress testing.
18. How does EAD help with stress testing?
    Simulates worst-case scenarios and helps institutions plan reserves.
19. Is this calculator free to use?
    Yes, it’s free and accessible online.
20. Does EAD apply to corporate loans only?
    No, it applies to personal, corporate, and retail credit exposures.

🏁 Conclusion

The EAD Calculator is a crucial tool for understanding credit exposure and managing financial risk. It supports banking professionals, risk managers, and compliance teams by providing a clear and quantitative way to assess the amount at risk in the event of borrower default.