when making loans banks tend to reduce their risk as much as they can they evaluate a borrower and determine the risk factors of lending to that borrower including the probability of them defaulting on the loan and how much the bank stands to lose if they do default loss given default lgd probability of default pd and exposure at default ead are calculations that help banks quantify their potential losses 
correction nov 3 2023 this article has been edited from a previous version that included an incorrect example of loss given default 