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Loss Given Default (LGD) Calculator

Calculate loss given default from exposure, recovery amount or rate, and estimate total credit loss.

LGD Parameters

Estimate recovery based on collateral and cash flows

Price of unsecured portion per $100 par

Formula: Workout LGD

Recovery = (Cash + Collateral Proceeds - Costs) / (1 + r)^t

LGD % = (1 - (Recovery / EAD)) × 100

Workout LGD accounts for the time value of money, as recoveries often take years to materialize. Administrative and legal costs are deducted directly from the gross recovery amount.

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Complete Guide to Loss Given Default (LGD)

Loss Given Default (LGD) quantifies the severity of a credit loss. It is the flip side of the Recovery Rate—money that is permanently lost when a borrower defaults.

Table of Contents

LGD vs. Recovery Rate

The relationship is simple logic: LGD = 1 - Recovery Rate.

If a bank recovers 60 cents on the dollar, the Recovery Rate is 60%, and the LGD is 40%. This recovered amount typically comes from:

  • Liquidation of collateral (homes, equipment, inventory).
  • Restructuring settlements (equity swaps).
  • Guarantee payouts.

Calculation Methods

Market LGD

Based on the trading price of defaulted bonds. It reflects the market's immediate expectation of recovery.

Formula: LGD = 1 - (Market Price / Par)

Workout LGD

Based on actual cash flows received during the collection process, discounted back to the date of default.

Formula: Uses Discounted Cash Flow (DCF)

Key Drivers of LGD

  1. Seniority: Senior debt gets paid first. Junior/Subordinated debt typically has much higher LGD.
  2. Collateral Quality: Cash and government bonds are liquid (Low LGD). Real estate and inventory are illiquid and volatile (Higher LGD).
  3. Legal Jurisdiction: Bankruptcy laws in creditor-friendly countries (e.g., UK, USA) often result in lower LGDs than in debtor-friendly jurisdictions.

The Concept of "Downturn LGD"

Recoveries are correlated with the economic cycle. In a recession, collateral values drop exactly when defaults rise.

Basel III requires banks to use Downturn LGD—estimates based on recessionary periods—when calculating regulatory capital, rather than long-run averages. This is usually much higher (e.g., Average LGD 30% vs Downturn LGD 50%).

Frequently Asked Questions

Common questions about LGD

Why are admin costs deducted?

The "Net Recovery" is what matters to the lender. Legal fees, auctioneer fees, and maintenance costs for seized assets eat into the gross proceeds significantly.

What discount rate should I use?

Typically, the loan's original Effective Interest Rate (EIR) is used. Some practitioners use a risk-adjusted rate reflecting the uncertainty of the recovery flows.

Can LGD be zero?

Yes, if the loan is fully cash-secured or guaranteed by a sovereign entity, LGD can differ to 0%.

Can LGD be more than 100%?

Technically yes, if legal costs exceed the recovery amount, the bank loses more than the principal. However, models usually cap LGD at 100%.

How does industry affect LGD?

Industries with tangible assets (Utilities, Real Estate) have lower LGDs. Service or Tech industries with intangible assets often have high LGDs (70-90%).

What is "Cure Rate"?

Some defaulted loans "cure" (return to performing status) with zero loss. The LGD for a portfolio is the weighted average of Cured Loans (0% LGD) and Liquidated Loans (High LGD).

Is LGD constant over time?

No. As a loan amortizes, LGD might change if collateral value moves differently than the loan balance (e.g. negative equity mortgages).

How do CDS auctions determine LGD?

After a default, a formalized auction sets the price for the defaulted bonds. This price determines the payout on Credit Default Swaps and serves as a benchmark for Market LGD.

What is the Basel floor for LGD?

For corporate unsecured exposures under Foundation IRB, Basel prescribes a fixed LGD of 45%.

Does calculating LGD help in pricing?

Absolutely. The interest rate spread must cover Expected Loss (PD × LGD). If LGD is high, the bank must charge a higher spread.

Summary

The Loss Given Default (LGD) Calculator models the severity of potential credit losses.

It supports both Market Implied (Trading Price) and Workout (Discounted Cash Flow) methodologies.

Use this tool to inform loan pricing, provisioning, and capital allocation decisions.

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Loss Given Default (LGD) Calculator

Calculate loss given default from exposure, recovery amount or rate, and estimate total credit loss.

How to use Loss Given Default (LGD) Calculator

Step-by-step guide to using the Loss Given Default (LGD) Calculator:

  1. Enter your values. Input the required values in the calculator form
  2. Calculate. The calculator will automatically compute and display your results
  3. Review results. Review the calculated results and any additional information provided

Frequently asked questions

How do I use the Loss Given Default (LGD) Calculator?

Simply enter your values in the input fields and the calculator will automatically compute the results. The Loss Given Default (LGD) Calculator is designed to be user-friendly and provide instant calculations.

Is the Loss Given Default (LGD) Calculator free to use?

Yes, the Loss Given Default (LGD) Calculator is completely free to use. No registration or payment is required.

Can I use this calculator on mobile devices?

Yes, the Loss Given Default (LGD) Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.

Are the results from Loss Given Default (LGD) Calculator accurate?

Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.