The expected return on a loan adjusts for default risk. If p = probability of repayment, then 1-p = probability of non-repayment. The expected non-repayment, E[loan amount*(1-p)], is an expected loss (EL) covered by loan loss provisions (a contra-asset account). A "cost of doing business".
And (k) and (p) are not independent: higher k implies riskier loans and higher expected default. As (k) and (p) are strongly negatively correlated, beyond a certain point, higher contractually promised returns correspond to lower expected returns.
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