What does the term "loss curve" refer to in the context of credit performance?

The term "loss curve" in the context of credit performance specifically refers to the expected cumulative loss for a portfolio over its life. It is a critical tool used by financial institutions to assess credit risk and manage potential losses that may occur throughout the life of financial instruments or credit portfolios. The loss curve illustrates how losses accumulate over time, providing insights into timing and severity of defaults, which is essential for risk management and regulatory compliance.

In practice, the loss curve helps organizations in forecasting potential losses based on historical data, allowing them to establish reserves and make strategic decisions concerning credit issuance and risk mitigation policies. It encompasses both the probability of default and the loss given default, thus offering a comprehensive view of credit risk exposure. The correct answer aligns with this understanding, highlighting the importance of cumulative losses in credit risk assessment.