EAD predicts bank's potential loss in borrower default at time of default. Calculated by adding drawn risk to percentage of undrawn risk. Banks calculate EAD for each loan to determine overall default risk. EAD is dynamic and changes as borrower repays lender
Credit cards allow borrowing from banks, while debit cards deduct from bank accounts. Both cards have 16-digit numbers, expiration dates, and EMV chips. Credit cards offer better fraud protection than debit cards
Basis point (BPS) is a unit of measurement for percentage changes in financial instruments. One basis point equals 0.01% or 1/100th of 1%. Term originates from "basis," referring to interest rate spread
Bank ratings are letter or numerical grades assigned by agencies. Ratings indicate credit risk and financial safety of institutions. Ratings are updated quarterly by bank supervisors
LGD represents the estimated financial loss when a borrower defaults on a loan. Banks calculate LGD by analyzing actual loan defaults and considering various variables. LGD is essential for Basel Model calculations of economic and regulatory capital
CDS is a financial derivative that transfers credit risk between investors. Buyer pays ongoing premium in exchange for protection against borrower default. Market size reached $4.3 trillion in 2023