The average credit loss expected over a period, equal to probability of default times loss given default times exposure. It is a cost of doing business, covered by pricing and provisions.
Where you will meet it
Expected loss comes up in 70 learning outcome notes across the FRM syllabus.
A few of them:
Banks FRM Part I · Financial markets and products
“Economic capital is measured as the loss at that confidence level minus the expected loss, because expected loss is covered by pricing and provisions.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Expected loss (EL) is the average loss an institution anticipates over a horizon.”
External and Internal Credit Ratings FRM Part I · Valuation and risk models
“Expected loss = PD × (1 − R) × EAD.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“Those three combine in the expected loss, shown here as EL = PD × EAD × LGD.”
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