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Probability of default
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<p>Probability of default (PD) is a financial term describing the likelihood of a <a href="/facts/Default_(finance)/tzRGlN51">default</a> over a particular time horizon. It provides an estimate of the likelihood that a borrower will be unable to meet its debt obligations. </p><p>PD is used in a variety of credit analyses and risk management frameworks. Under <a href="/facts/Basel_II/T4Sn0p1d">Basel II</a>, it is a key parameter used in the calculation of <a href="/facts/Economic_capital/25nGBnlE">economic capital</a> or <a href="/facts/Regulatory_capital/WUoXKG0q">regulatory capital</a> for a banking institution. </p><p>PD is closely linked to the <a href="/facts/Expected_loss/l02qfrLm">expected loss</a>, which is defined as the product of the PD, the <a href="/facts/Loss_given_default/H7or47Ft">loss given default</a> (LGD) and the <a href="/facts/Exposure_at_default/wYzj5Kj4">exposure at default</a> (EAD). </p>