Lifetime Expected Credit Losses

Definition

Lifetime Expected Credit Losses are the expected credit losses that result from all possible default events over the expected life of a financial instrument.

Formula

Conceptually the definition is captured in the following mathematical expression

${\mbox{LECL}}_{t}=\sum _{i=t}^{T}D(t,i)\mathbb {E} _{\mathbb {P} }({\mbox{LGD}}_{i}{\mbox{EAD}}_{i}1_{\{d_{i}=1\}}|F_{t})$

• Where t is the reporting date
• T is the Expected Life of the instrument
• i denotes possible times of default / loss (normally associated with instrument cashflows)
• d_i is the random (unknown) event of default at time i
• LGD denotes Loss Given Default
• EAD denotes Exposure at Default
• D(t,i) denotes the discount rate at time t (based on the Effective Interest Rate, for the different cashflow maturities i
• F_t denotes the subjective but Forward-Looking Information set used formulate the estimate at time t
• P denotes the subjective assignment of default probabilities to the events d_i

This formula captures the essence of the definition. In practice evaluation of LECL may utilize a variety of simplified / approximate forms. A common simplification is the use of the concept of Lifetime PD

See Also

• 12-month Expected Credit Losses

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