What Are Expected Losses?

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As defined in the EU’s Capital Requirements Regulations, Expected Losses - or EL for short - is the amount expected to be lost on an exposure from dilution over a period of one year or from a potential default of a counterparty.

However, for securitised assets, it is the actual principal write-down suffered by the instrument, net of any impairment already  taken through Profit & Loss.

For Counterparty Credit Risk, the projected losses are comprised of default losses (i.e. losses due to default of counterparties which is captured by the definition as above) and Credit Valuation Adjustment (CVA)  impact (i.e. fair value losses and gains arising from changes in the credit worthiness of a firm’s counterparties).