Exposure at Default (EAD) is the total outstanding credit exposure a lender faces at the moment a borrower defaults — including drawn balances, accrued interest, and an estimate of additional draws on undrawn commitments before default is declared.
EAD is the third pillar of the Basel IRB expected-loss triangle (PD × LGD × EAD = Expected Loss). For a fully drawn term loan, EAD = current outstanding balance. For revolving facilities (lines of credit, credit cards), EAD is more complex because borrowers may draw down the undrawn commitment just before or during financial distress — a well-documented phenomenon called 'draw-down risk' or 'run on the line.' Basel III quantifies this for revolving facilities through the Credit Conversion Factor (CCF): EAD = drawn balance + (CCF × undrawn commitment). The Basel Committee sets CCF floors depending on facility type and tenor (bis.org/bcbs/publ/d424.htm). For unconditionally cancellable commitments, the floor CCF is 10%; for non-cancellable revolving commitments, 40-100%. The Federal Reserve's capital rules implement CCFs in Regulation Q (12 CFR Part 3, 12 CFR Part 217 — ecfr.gov). For small business borrowers, EAD informs credit limit decisions. A lender offering a $500,000 revolving line must hold capital against EAD — if borrowers historically draw to 90% before defaulting, the effective EAD is $450,000 even when only $200,000 is currently drawn. This is why revolving facility pricing includes non-utilization fees and why credit limits are tightly managed relative to capital ratios.
Borrowers in financial stress often max out revolving credit lines before defaulting — drawing on every available dollar. EAD models this behavior by adding an estimated fraction of the undrawn commitment to the current balance. Term loans have no undrawn component, so EAD = outstanding balance.
Higher EAD increases the capital a bank must hold against the facility, raising its cost of funds. Non-utilization fees (fees on the undrawn portion) partially compensate lenders for carrying the CCF-adjusted capital against unused capacity. Facilities with high undrawn balances may carry higher all-in costs than their stated rates suggest.
Yes. SBA CAPLines and SBA Express revolving facilities have undrawn components, so lenders apply CCF-equivalent estimates to size capital requirements. Fixed-amount SBA 7(a) term loans have straightforward EAD = remaining balance. The SBA guarantee reduces net EAD exposure for lenders on the guaranteed portion.