LGD Calculator

What Loss Given Default measures

LGD quantifies the severity of a credit loss as a percentage of the total exposure outstanding at the moment the borrower defaults. A high LGD indicates that the lender recovers very little from the defaulted position — common with unsecured consumer debt — while a low LGD implies effective collateral or recovery mechanisms, as is typical with well-secured mortgage portfolios.

Financial institutions use LGD in conjunction with Probability of Default (PD) and Exposure at Default (EAD) to calculate Expected Loss: EL = PD × LGD × EAD. This trio underpins the Internal Ratings-Based (IRB) approach under Basel II/III capital adequacy rules, as well as IFRS 9 and CECL impairment provisioning.

LGD formula and calculation

The standard LGD calculation starts from the recovery rate. Recovery Rate equals the amount recovered from the defaulted exposure divided by the Exposure at Default. LGD is then one minus the Recovery Rate. For example, if a bank is owed 100,000 and recovers 40,000 through collateral liquidation, the recovery rate is 40% and the LGD is 60%.

In practice, recovery amounts should be discounted to present value using an appropriate discount rate — often the contract rate or an effective interest rate — because recoveries typically arrive over months or years after the default event. Ignoring the time value of money overstates the recovery rate and understates LGD.

Factors that influence LGD

Collateral type and coverage are the strongest determinants. Senior secured loans backed by real property or high-quality financial collateral typically achieve LGDs of 20–40%, while subordinated unsecured exposures can exceed 70–90%.

Seniority in the capital structure matters because senior creditors are repaid before junior tranches during insolvency proceedings. Industry sector, jurisdiction-specific bankruptcy laws, economic conditions at the time of default, and workout costs all contribute to final recovery outcomes.

Downturn LGD — the loss severity observed during stressed economic periods — is required by Basel rules for regulatory capital calculations because recoveries tend to be materially lower in recessions than during benign conditions.

Worked example

A commercial bank extends a 500,000 term loan secured by equipment. The borrower defaults after drawing the full facility. Over the following 18 months the bank liquidates the collateral for 175,000 and negotiates an additional 50,000 cash settlement. Total recovery is 225,000.

Recovery Rate = 225,000 / 500,000 = 0.45 (45%). LGD = 1 − 0.45 = 0.55 (55%). The bank expects to lose 275,000, or 55 cents of every dollar exposed, on this default. If the bank's PD model assigns a 2% annual default probability, the one-year expected loss for this exposure is 0.02 × 0.55 × 500,000 = 5,500.

LGD in regulatory capital frameworks

Under the Foundation IRB approach of Basel II/III, supervisory LGD values are prescribed: 45% for senior unsecured exposures and 75% for subordinated claims, with reductions allowed for eligible collateral. The Advanced IRB approach permits banks to use their own internal LGD estimates, subject to rigorous model validation and a downturn LGD floor.

IFRS 9 and CECL accounting standards also require lifetime LGD estimates for impaired exposures, driving a significant modelling and data-quality investment across the banking sector. Institutions must maintain historical recovery databases that support point-in-time and through-the-cycle LGD estimation.

Limitations of this calculator

This tool provides a simple point-estimate LGD from gross recovery amounts. It does not discount recoveries for time value, does not subtract workout or legal costs from the recovery figure, and does not model downturn conditions. For regulatory or provisioning purposes, institutions should use full recovery-workout models that incorporate discounting, direct and indirect costs, and economic-cycle adjustments.