Expected Loss (EL) in credit risk refers to the

Solution

Expected Loss (EL) in credit risk refers to the anticipated financial loss from a borrower's default, encompassing the probability of default (PD), the potential loss given default (LGD), and the exposure at default (EAD). It is a key metric for assessing , quantifying and managing credit risk, helping financial institutions estimate potential losses and make informed decisions about lending, pricing, and risk management.    Components of EL:  

• Probability of Default (PD):  The likelihood that a borrower will not repay a loan or meet other financial obligations.   
• Loss Given Default (LGD):  The percentage of the outstanding loan balance that a lender is expected to lose if a borrower defaults, accounting for collateral recovery.   
• Exposure at Default (EAD):  The total amount of credit exposure a lender has at the time of default, including outstanding loan balances.