Banking & Enterprise Risk Lab

Credit Risk & Expected Loss Calculator

Model loan portfolio credit risk, Probability of Default (PD), Loss Given Default (LGD), Exposure at Default (EAD), Expected Loss, and RAROC.

Credit Portfolio Engine Macro Stress Testing Basel Risk Theory FAQ

Portfolio Archetypes

Load calibrated credit lending benchmarks.

Step 1: Set Loan Portfolio Exposure, Default Probability, LGD & Margins

Loan Portfolio Risk Inputs

Total committed / outstanding loan principal.
Annual default probability (1-year horizon).
100% minus expected collateral recovery.

Volatility & Capital Confidence Parameters

Z=3.09 for 99.9% Basel standard.
Annual Expected Loss (EL)
$0.79M
0.53% annualized loss rate (PD x LGD)
Unexpected Loss (Capital)
$9.52M
Economic Capital cushion at 99.9% confidence
Portfolio RAROC
50.0%
Risk-Adjusted Return on Capital
Net Risk-Adjusted Income
$4.76M
Interest + fees less EL & operating costs

Macroeconomic Credit Stress-Testing Matrix

Evaluates portfolio resilience under severe macroeconomic recession shocks and liquidity crises.

Economic Stress Scenario Stressed PD (%) Stressed LGD (%) Expected Loss (EL) Economic Capital (UL) Portfolio RAROC (%)

Credit Risk & Basel Framework

Principles of Credit Portfolio Risk

Key risk management principles governing banking and debt portfolios:

  • EL vs. UL Dual Framework: Expected Loss is priced into loan interest margins and loss reserves, whereas Unexpected Loss represents extreme tail-risk cushioned by equity capital.
  • Collateral Structure & LGD: Strong security, personal guarantees, and first-lien seniority protect lenders by capping LGD during insolvency.
  • The 15% RAROC Hurdle: Commercial banks and private credit funds typically mandate a minimum 15% RAROC to cover corporate cost of equity capital.
  • Correlation & Diversification: Industry or geographic concentration magnifies unexpected loss volatility, demanding higher equity buffers.

Test corporate insolvency risk in the Altman Z-Score Lab.

Mathematical Formulation

Credit risk equations

Expected_Loss = EAD × PD × LGD

EL_Rate = PD × LGD

σ_Loss = EAD × √( PD × σ_LGD² + LGD² × σ_PD² )

Unexpected_Loss = Z × σ_Loss

Net_Income = Interest_Rev + Fee_Inc - EL - Opex

RAROC = ( Net_Income ÷ Unexpected_Loss ) × 100%

Model Value at Risk in the Value at Risk (VaR) Lab.

FAQ

Credit risk & Basel questions

What is the difference between Expected Loss and Unexpected Loss?

Expected Loss (EL = EAD x PD x LGD) is the predictable, statistical cost of doing business that is covered through loan pricing and loss provisioning. Unexpected Loss (UL) represents the peak volatility of losses during extreme downturns and must be absorbed by equity Economic Capital.

What is Risk-Adjusted Return on Capital (RAROC)?

RAROC measures the net financial return of a loan portfolio relative to the economic risk capital allocated to support it: RAROC = (Interest Income + Fees - Expected Loss - Operating Costs) / Economic Capital.

How does Loss Given Default (LGD) relate to collateral recovery?

LGD is the percentage of exposure lost if a borrower defaults: LGD = 100% - Recovery Rate. Senior secured loans backed by high-quality commercial real estate or liquid collateral typically have lower LGD (20%-35%) than unsecured debt (60%-80%).

Why do banks use a 99.9% confidence interval for credit capital?

Basel regulatory standards require financial institutions to hold sufficient capital reserves to withstand severe 1-in-1,000 year market stress events, corresponding to a standard normal multiplier of Z = 3.09.

Can I export the credit risk analysis and stress test to CSV?

Yes. You can export complete portfolio metrics, expected and unexpected loss calculations, Basel capital requirements, and stress scenario breakdowns as a UTF-8 CSV spreadsheet with formula defense.

Continue Exploring Risk & Resilience Tools

Explore our Risk & Resilience Hub, predict corporate bankruptcy in the Altman Z-Score Lab, run probabilistic cash flow distributions in the Monte Carlo Lab, calculate portfolio volatility in the Value at Risk Lab, or stress-test business shocks in the Business Resilience Lab.