Expected loss (EL) is the amount of a credit exposure that a creditor (lender, lessor) can expect to lose in the event of default on a credit exposure equal to the exposure less the value of the collateral in the event of default of the debtor. EL is the value of a possible loss times the probability of that loss occurring and is reflected in risk-based pricing and viewed as part of the cost of credit extension. Since it is additive, the expected loss on a portfolio of financial assets (loans, leases) is the sum of the EL on all transactions.
Leases have a comparative advantage over other financing due to their higher recovery rates in the event of default. The average recovery rate for defaulted automotive and real estate leasing contracts is generally higher than for defaulted senior secured bank loans and comparable with those for the best senior secured bonds. Moreover, since the leased equipment is essential for the continued operation of a business, many defaulted leases regrade back to a healthy situation with zero loss.
|Average Loss Rates Across Leased Assets|
|Machinery & |
|Computers & |
|Source: Leaseurope/Deloitte France|
Research of equipment financing transactions in Canada, Europe and the United States shows that leasing has a 40% lower PD than lending. Recent studies of 3.3 million lease contracts in 15 European countries demonstrate that default and loss rates for leases are significantly lower than for traditional lending, where one-year defaults on retail and SME leasing exposures were 2.7% compared to 4.5% for all retail and SME lending. Similarly, the loss given default for leasing was 19.6% compared to 33% for all retail and SME lending.