EAD Modelling Explained: Exposure at Default Under IFRS 9

An EAD model IFRS 9 estimates how much exposure is expected to be outstanding at the time a borrower defaults.

Exposure at Default is one of the three core components of Expected Credit Loss, alongside Probability of Default and Loss Given Default. A reliable exposure at default model should reflect how balances may change before default, not simply use the current outstanding amount.

What Is Exposure at Default?

IFRS 9 EAD represents the expected exposure at the point of default.

For a simple amortizing loan, EAD may follow the contractual repayment schedule.

For revolving facilities such as credit cards, overdrafts and working-capital lines, the calculation is more complex because customers may repay, redraw or use additional undrawn limits before default.

Common EAD Modelling Methods

The appropriate Exposure at Default approach depends primarily on the product structure. Within the IFRS 9 framework, exposures can generally be grouped into Amortizing, Revolving and Bullet products.

Amortizing Products

For amortizing facilities, EAD is projected based on the expected outstanding balance over the remaining life of the facility, considering the contractual repayment profile and scheduled reductions in principal.

Revolving Products

For revolving facilities such as credit cards and overdrafts, EAD requires additional behavioral assumptions because customers can repay and redraw available limits. The methodology therefore considers the Credit Conversion Factor to estimate potential utilization of undrawn limits, together with the behavioral life of the product to determine how long the exposure is expected to remain outstanding.

A common relationship is:

EAD = Drawn Balance + (CCF × Undrawn Limit)

Bullet Products

For bullet facilities, where principal is generally repaid at maturity, the outstanding exposure typically remains largely unchanged during the contractual term. EAD is therefore projected based on the expected outstanding balance until the bullet repayment occurs.

What Data Is Required?

A practical EAD calculation may require:

• Outstanding balances
• Approved limits
• Undrawn amounts
• Historical utilization
• Repayment behavior
• Redraw behavior
• Default dates
• Product maturity
• Limit changes before default

The quality of historical behavioral data is especially important for revolving exposures.

EAD and Expected Life

For lifetime ECL, EAD may need to be projected across the remaining expected life of exposure.

For amortizing products, balances may decline over time. For revolving facilities, the model may need to consider future drawings and repayments rather than assuming a fixed balance.

This is why a strong IFRS 9 EAD framework should produce an EAD term structure rather than only a single exposure value.

Key Takeaway

An EAD model IFRS 9 should answer a simple question:

How much exposure is likely to exist when default occurs?

For term loans and Bullet loans, contractual balances may be sufficient. For revolving facilities, credit conversion factor, repayment behavior and redraw assumptions can become critical.

A good exposure at default model should therefore reflect the actual behavior of the product, be supported by historical data and remain transparent enough to validate and explain.