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Loss Given Default (LGD) โ€” Smart Financial Analysis

Calculate how much a lender loses when a borrower defaults. LGD = 1 - Recovery Rate. Used in Basel capital requirements: Expected Loss = PD ร— LGD ร— EAD.

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Loss Given Default (LGD) measures how much a lender actually loses when a borrower defaults, expressed as a percentage of the loan. LGD = 1 - (Net Recovery / Exposure at Default). LGD and recovery rate are inverse: LGD = 1 - Recovery Rate. Basel II/III requires banks to estimate LGD for capital requirements.

Key figures
Core Concept
Loss Given Default (LGD)
Risk Management fundamental
Benchmark
Industry Standard
Compare your results
Proven Math
Formula Basis
Established methodology
Expert Verified
Best Practice
Professional standard

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Why: Loss Given Default (LGD) measures how much a lender actually loses when a borrower defaults, expressed as a percentage of the loan. LGD = 1 - Recovery Rate. Secured loans typica...

How: Enter Exposure at Default (EAD), Amount Recovered ($), Cost of Recovery ($) to get instant results. Try the preset examples to see how different scenarios affect the outcome, then adjust to match your situation.

Loss Given Default (LGD) measures how much a lender actually loses when a borrower defaults, expressed as a percentage of the loan.LGD = 1 - (Net Recovery / Exposure at Default).
Sources:InvestopediaFederal Reserve

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Calculate Loss Given Default (LGD)Enter your values below

๐Ÿ“Œ Example Scenarios โ€” Click to Load

Input Values

%
lgd_analysis
CALCULATED
LGD
35.0%
Recovery Rate
65.0%
Loss Amount
$3,500,000
Expected Loss
$70,000
Share:

LGD by Asset Class

Recovery Rate Spectrum (Recovered vs Lost)

LGD Comparison: Normal vs Downturn

Expected Loss Waterfall (PD ร— LGD ร— EAD)

For educational purposes only โ€” not financial advice. Consult a qualified advisor before making decisions.

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Loss Given Default (LGD) measures how much a lender actually loses when a borrower defaults โ€” expressed as a percentage of the loan. LGD = 1 - Recovery Rate. Secured loans (backed by collateral) have LGD of 20-40%, while unsecured consumer debt has LGD of 60-90%. During the 2008 crisis, LGD on mortgage-backed securities spiked from 25% to 55% โ€” 'downturn LGD.' Basel II/III requires banks to estimate LGD for capital requirements: Expected Loss = PD ร— LGD ร— EAD. Understanding LGD is crucial for credit risk management.

35%
Senior Secured Loan LGD
90%
Credit Card LGD
55%
2008 Crisis MBS LGD
PDร—LGDร—EAD
Expected Loss Formula

๐Ÿ“‹ Key Takeaways

  • โ€ข LGD = 1 - Recovery Rate โ€” they are inverse measures
  • โ€ข Secured loans (collateral) typically have LGD of 20-40%
  • โ€ข Unsecured consumer debt (credit cards) has LGD of 80-95%
  • โ€ข Downturn LGD spikes in recessions โ€” 2008 MBS LGD rose from 25% to 55%

๐Ÿ“Š LGD by Asset Class

Asset class drives LGD. Senior secured loans recover 60-80% (LGD 20-40%). Residential mortgages recover 70-85% (LGD 15-30%). Credit cards recover 5-20% (LGD 80-95%). Basel requires banks to estimate LGD by segment for IRB capital.

๐Ÿ›๏ธ LGD in Basel II/III

Basel II/III requires banks to estimate LGD for regulatory capital. Expected Loss = PD ร— LGD ร— EAD. Banks using the Internal Ratings-Based (IRB) approach must have robust LGD models. Downturn LGD is used for stress testing. Federal Reserve SR 11-7 provides guidance on model risk management.

๐Ÿ“‰ Downturn LGD

During economic stress, collateral values fall and recovery rates drop. Downturn LGD reflects losses in adverse scenarios. Regulators require conservative estimates. The 2008 financial crisis demonstrated how quickly LGD can spike when markets collapse.

โฑ๏ธ Recovery Process

Recovery takes time โ€” legal proceedings, collateral liquidation, and administrative costs reduce net recovery. Discount future recoveries to present value. Recovery costs (legal, collection) directly reduce effective recovery rate and increase LGD.

โš–๏ธ LGD by Collateral Type

Asset TypeTypical LGDRecovery Rate
Senior Secured20-40%60-80%
Residential Mortgage15-30%70-85%
CRE25-40%60-75%
Unsecured Bond60-75%25-40%
Credit Card80-95%5-20%

โ“ Frequently Asked Questions

What is Loss Given Default (LGD)?

Loss Given Default (LGD) measures how much a lender actually loses when a borrower defaults, expressed as a percentage of the loan. LGD = 1 - Recovery Rate. Secured loans typically have LGD of 20-40%, while unsecured consumer debt has LGD of 60-90%.

What is the LGD formula?

LGD = 1 - (Net Recovery / Exposure at Default). Net Recovery = Amount Recovered - Cost of Recovery. For example, a $10M loan with $6.5M recovered has LGD = 1 - 0.65 = 35%.

What is the relationship between LGD and recovery rate?

LGD and recovery rate are inverse: LGD = 1 - Recovery Rate. If you recover 65% of a defaulted loan, you lose 35% (LGD). Higher collateral typically means higher recovery rate and lower LGD.

How does LGD fit into the Basel framework?

Basel II/III requires banks to estimate LGD for capital requirements. Expected Loss = PD ร— LGD ร— EAD. Banks using the Internal Ratings-Based (IRB) approach must have robust LGD models. Downturn LGD is used for stress testing.

What is downturn LGD?

Downturn LGD reflects losses during economic stress when collateral values fall and recovery rates drop. During the 2008 crisis, LGD on mortgage-backed securities spiked from ~25% to 55%. Regulators require conservative downturn LGD estimates.

How does LGD vary by asset class?

Senior secured loans: 20-40% LGD. Unsecured bonds: 60-75%. Residential mortgages: 15-30%. Credit cards: 80-95%. Commercial real estate: 25-40%. Sovereign debt: 40-60%. Collateral quality drives the difference.

โš ๏ธ Disclaimer: This calculator provides estimates for educational purposes. Actual LGD varies by jurisdiction, collateral, and economic conditions. Consult regulatory guidance and professional advisors for capital and provisioning decisions.

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