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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Expected loss

What is expected loss, and how does a bank use it?

ONE OF 80 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

Expected loss is what a bank expects to lose on a loan on average: the probability that the borrower defaults, multiplied by the share of the exposure the bank would lose if it did, multiplied by the exposure at that moment. Each factor is a separate reading — the rating grade gives the probability of default, the security and its realisable value give the loss given default, and the facility's shape gives the exposure at default. It is the number a risk margin is built from and the number provisions are held against, and it is why a well-secured loan to a weaker borrower can be priced below an unsecured loan to a stronger one.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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