Credit Loss

From Open Risk Manual

Definition

Credit Loss, in the context of IFRS 9 [1] but also more broadly, is the difference between all contractual cash flows that are due to an entity in accordance with the contract and all the cash flows that the entity expects to receive (i.e., all cash shortfalls), discounted at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).

Notation

Upon a credit default event, the credit loss variable is given by


\mbox{L}_k^i = \mbox{LGD}_k^i \mbox{EAD}_k^i 1_{\{ R_k^i = D\}}

where R_k^i is a variable capturing the credit standing (Credit Rating) of an obligor

Issues and Challenges

The above definition of credit loss has a conceptual overlap with the definition of Expected Credit Loss in that it already considers the expected shortfalls versus the contractual cash flows, hence making the definition of an Expected Credit Loss measure redundant. The Credit Loss is actually an uncertain (unknown) quantity before the possible credit event and should ideally be described as the potential range of losses that can be anticipated at a measurement time

References

  1. IFRS Standard 9, Financial Instruments

External Links

See Also


Contributors to this article

» Wiki admin