MANAGEMENT

Detailed explanation-1: -Default probability, or probability of default (PD), is the likelihood that a borrower will fail to pay back a debt. For individuals, a FICO score is used to gauge credit risk. For businesses, probability of default is reflected in credit ratings.

Detailed explanation-2: -The likelihood of loss materialization is tied to the borrower’s probability of default (PD) while the severity of loss in the event of default is accounted for the loss given default (LGD).

Detailed explanation-3: -Expected Loss = EAD x PD x LGD While the equation itself may be simple, deriving the variables takes time and considerable analysis. PD and LGD represent the past experience of a financial institution but also represent what an institution expects to experience in the future.

Detailed explanation-4: -An obligor rating, based on the risk of borrower default and representing the probability of default by a borrower or group in repaying its obligation in the normal course of business and that can be easily mapped to a default probability bucket.