A loss-sharing rule determines how a financial shortfall is borne when a participant in a payment or other financial system fails to meet its obligations, or when the system itself becomes unable to settle. It establishes the basis for distributing the resulting loss among the parties concerned. The arrangement may rely on a predetermined formula or another specified allocation method and takes effect under the conditions set out in the related loss-sharing agreement.
Source: European Central Bank (ECB) (source). This glossary entry is an independently worded adaptation of the cited information.