Expected Credit Loss Calculation: PD × LGD × EAD Explained

The ECL formula

ECL = PD × LGD × EAD. PD (Probability of Default) is the likelihood the borrower will default. LGD (Loss Given Default) is the percentage of the exposure you will lose if default occurs. EAD (Exposure at Default) is the outstanding amount at the time of default.

12-month ECL vs Lifetime ECL

Stage 1 loans use 12-month ECL: the loss expected from defaults within the next 12 months. The formula applies an annualisation factor — typically 15% of the lifetime PD. Stage 2 and Stage 3 loans use lifetime ECL: the full expected loss over the remaining life of the loan. This is why moving from Stage 1 to Stage 2 significantly increases provisions.

How PD is determined

PD varies by loan type and borrower rating. A mortgage with an A-rated borrower might have a 0.8% PD. A corporate loan with a D-rated borrower could have a 15% PD. LoanStage uses calibrated PD parameters by loan type: mortgage (0.8–4%), consumer (1.5–8%), corporate (1–6%), SME (1.2–7%).

How LGD is determined

LGD depends on collateral. A fully collateralised mortgage might have an LGD of 10–15%. An unsecured consumer loan could have an LGD of 55–65%. LoanStage calculates dynamic LGD based on collateral type (real estate, equipment, receivables), gross collateral value, and haircuts (20% for property, higher for other types).

Example calculation

Term loan: EAD = €500,000. Borrower rating C. DPD = 45 days (Stage 2). PD = 6% (lifetime). LGD = 45% (unsecured). ECL = 6% × 45% × €500,000 = €13,500. This €13,500 provision must be recognised in your P&L and balance sheet.

Automating ECL with LoanStage

LoanStage calculates ECL for every loan in your portfolio automatically. Upload a CSV, and the engine applies the correct PD, LGD and EAD for each loan type and stage. Every calculation is logged with the formula used.

Upload your loan portfolio and get PD × LGD × EAD calculations for every loan in seconds.