A measure of a bank’s exposure to losses arising from defaulting loans. It represents the total amount of potential losses that a bank is exposed to at the time a loan defaults. Exposure at default (EAD) is a a parameter, for a bank’s exposure to default losses, used in the calculation of economic capital or regulatory capital under Basel II. It represents the gross exposure under a facility (a loan, line of credit, etc.) upon default of an obligor (a borrower or the party obliged to fulfill).
It reflects the size of the credit risk exposure that a bank expects to have on a credit facility on the assumption that economic downturn conditions would prevail within a one-year time horizon, during which default by a borrower on its obligations takes place.
In a broader context, EAD is known a a credit exposure.
