Exposure at default is driven by the type of loan product, and the level of difficulty in calculating the EAD varies for those different types. You can see here a number of types on the slide, and we'll go through each one. A revolving credit facility, you can see at the top, sometimes called an RCF, is often used by businesses to meet short-term liquidity requirements. For example, they might use it to finance their working capital. It's like an overdraft, but for a business. So what does this mean for the expected exposure or EAD if the client were to default in the future? If the facility is fully committed, the client should draw on the RCF at any stage up to the pre-agreed facility limit. The facility limit will be at the maximum possible EAD if the client draws up to the limit. Now, the client might not be fully drawn on that limit, but there's an assumption that if the client gets into trouble financially, they're gonna be using all of the financial tools at their disposal and that would include a fully committed RCF. And so the assumption is, that the EAD tends to be on the higher side or the maximum RCF. Longer-term products, which you can see at the bottom work a bit differently. An equal amortizing loan is the least risky from the bank's perspective in terms of EAD. The principal in this type of loan is being paid periodically over the term of the loan. The principal is being repaid through periodic payments during the loan's life. And you can see there's no bullet repayment at the end. This means as time goes on, there's less EAD for the lender and that's because more of the loan has been repaid. A good example of one of these is a repayment mortgage. On the other side, a bullet loan is the riskiest, and that's where the principal is repaid in its entirety at the maturity of the loan, this could be called an interest-only loan. The initial principal of the loan, will be outstanding for its entire life and that means the EAD will not decline over time. There are loans that have features of both bullet and equal amortizing loans, where principal repayments are made throughout the life of the loan, but not enough to repay all the principal before maturity, meaning a significant amount of the principal remains outstanding at the maturity date of the loan. This repayment carries less credit risk than a bullet repayment loan, but more risk than an equal amortizing loan. This type of loan is typical for commercial mortgages.
