Expected Credit Loss Model

The Expected Credit Loss (ECL) model is a financial method used by lenders and investors to estimate the potential future losses from lending or credit exposure. It assesses the likelihood that a borrower might not repay and calculates the expected amount of loss over the life of the loan, considering current economic conditions and borrower data. This proactive approach helps institutions set aside appropriate reserves, ensuring they are prepared for possible defaults, and promotes more accurate risk management and financial reporting.