Exposure at default (EAD)
What is exposure at default?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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Exposure at default is how much a bank expects to be owed if a borrower defaults: the whole balance of a term loan, and for a revolving facility the drawn balance plus a share of the undrawn limit, because a borrower in trouble draws what it can before it fails. It is the third factor of expected loss, beside probability of default and loss given default. It is why an undrawn line still carries risk and capital, and why a limit larger than the business needs is not free to the bank.
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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