Calibrating exposure at default for corporate credit lines

The management of credit risk inherent in a corporate credit line is similar to that of a term loan, but with one key difference. In addition to needing to know the borrower's probability of default and the facility's loss given default, the bank must also have a measure of the line's exposure at default (EAD). In fact, EAD is one of the key parameters used for regulatory capital calculations within the Basel II framework. This paper constructs and examines EAD values for credit lines within the Spanish credit register, which provides a census of all corporate lending within Spain over the last 20 years. The analysis shows that defaulting firms have significantly higher credit line usage rates and EAD values up to five years prior to their actual default. Furthermore, the analysis indicates that there are important variations in EAD values due to credit line size, collateralisation and maturity. While the results are derived from data for a single country, they should provide useful benchmarks for further academic, business and policy research into this under-developed area of credit risk management.