Loss Given Default (LGD) Calculator
Print| LGD Percentage | 0.00% |
| Recovered Amount ($) | $0.00 |
Loss Given Default (LGD) is a critical credit risk metric in commercial banking, corporate lending, and fixed-income portfolio management. It measures the percentage of an asset or loan exposure that is permanently unrecoverable when a borrower defaults. Together with Exposure at Default (EAD) and Probability of Default (PD), LGD forms the foundational triad of Basel capital compliance and Expected Loss (EL) modeling.
Our free Loss Given Default (LGD) Calculator computes your net recovery rate, workout costs, dollar default loss, and LGD percentage for credit risk management.
How to Calculate Loss Given Default (LGD)
LGD evaluates actual default loss relative to total exposure at default or derives loss as the inverse of the recovery rate.
The Loss Given Default Formulas:
LGD (%) = 1 - Recovery Rate (%)
LGD ($) = Exposure at Default (EAD) - Net Recovered Amount
Net Recovered Amount = Gross Collateral Recovered - Workout & Legal Expenses
Sub-Formula Components:
- Exposure at Default (EAD): Total outstanding loan principal, accrued interest, and undrawn credit lines at the exact moment of borrower default.
- Gross Collateral Recovered: Gross proceeds obtained from liquidating pledged assets, court settlements, or debt restructuring.
- Workout Expenses: Direct costs incurred during recovery, including attorney fees, legal administration, auction charges, and repossession costs.
- Expected Loss (EL):
Expected Loss = PD × EAD × LGD
LGD Benchmarks by Debt Seniority & Collateral
LGD varies significantly depending on asset collateralization and debt claim seniority in bankruptcy proceedings:
| Debt Seniority / Collateral Class | Typical LGD Range | Average Recovery Rate | Risk Profile |
|---|---|---|---|
| Senior Secured Debt | 10% – 30% | 70% – 90% | Lowest risk; backed by first-lien physical assets. |
| Senior Unsecured Debt | 40% – 60% | 40% – 60% | Moderate risk; priority claim over unpledged corporate assets. |
| Subordinated / Mezzanine Debt | 70% – 85% | 15% – 30% | High risk; junior to all senior creditors in liquidation. |
| Unsecured Credit / Credit Cards | 80% – 100% | 0% – 20% | Maximum loss risk; zero underlying collateral support. |
Step-by-Step Calculation Example
Suppose a commercial loan defaults with the following specifications:
- Exposure at Default (EAD): $500,000
- Gross Collateral Recovered: $320,000
- Workout & Legal Expenses: $20,000
Step 1: Compute Net Recovered Amount
Net Recovery = $320,000 - $20,000 = $300,000
Step 2: Compute Recovery Rate (RR)
Recovery Rate = $300,000 / $500,000 = 60.0%
Step 3: Compute Loss Given Default (LGD)
LGD (%) = 1 - 0.60 = 40.0%
LGD ($) = $500,000 - $300,000 = $200,000
Frequently Asked Questions (FAQ)
Why is LGD vital for Basel II / III regulatory capital?
Under Basel IRB (Internal Ratings-Based) approaches, banks must calculate LGD to determine their Risk-Weighted Assets (RWA) and mandatory statutory capital reserves required against loan defaults.
What factors influence the Loss Given Default?
LGD depends on collateral valuation, asset liquidity, claim seniority rank in bankruptcy court, legal jurisdiction efficiency, and prevailing macroeconomic downturn conditions.
What is Downturn LGD?
Downturn LGD is an estimated loss given default during severe economic recessions when asset values shrink, recovery rates drop, and default correlations increase simultaneously.