Chart 2. The title is Regulatory Capital Using the Loss Distribution Approach
(A line chart). It shows the probability of expected and unexpected losses. Expected losses (EL) are reflected on the chart as the portion to the left of the dotted line marking the mean of the distribution. The dotted line represents the mean or expected value of the aggregate distribution of potential losses. Loss levels falling in the EL category are typically highly predictable and stable, and generally arise under normal operating circumstances. Banks may potentially use capital-like substitutes (such as eligible generally accepted accounting procedure reserves) or other conceptually sound methods to offset some portion of EL.
Unexpected losses (UL) on the chart are the area to the right of the dotted line. Migrating to the far right of the UL category (or the tail of the distribution) provides an increasingly high level of confidence that the estimate captures the appropriate degree of severity.