LGD is the abbreviation of default loss, which means: default loss.

EAD is the abbreviation of Exposure at Default, which means: default risk exposure.

The formula for calculating the relationship between them is as follows:

Under the MM framework, banks can use internal risk measurement models (such as Monte Carlo simulation) to estimate EAD.

The calculation logic is as follows:

EAD =α× effective PD;

Effective EPE = effective e (tk) ×△ tk (k =1to min( 1 year, due);

Effective EE(tk) = max (effective LGD(tk- 1), ee (tk));

Extended data:

The background of the relationship between bank risk PD, LGD and EAD;

1. Regulatory review process: the supervisor decides whether the bank can operate reasonably through monitoring and proposes improvement plans.

2. Market restraint function, that is, market discipline: banks are required to improve information transparency and let the outside world better understand their finance and management.

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