Loss Given Default (LGD) Calculator

Loss Given Default (LGD)

Loss Given Default (LGD) is a crucial concept in credit risk management and financial analysis. It represents the proportion of an asset or loan that a lender loses if the borrower defaults, after accounting for recoveries. In other words, LGD indicates how much of the loan exposure remains unrecovered when a borrower fails to meet their obligations.

Financial institutions, risk managers, and investors rely heavily on LGD to estimate credit risk exposure and assess potential financial losses. It is one of the three main components of credit risk modeling alongside Probability of Default (PD) and Exposure at Default (EAD), which together form the foundation of modern risk assessment frameworks like Basel II and Basel III.

Key Definitions

Recovery Rate (%): The percentage of the loan amount that can be recovered in the event of default, typically from collateral or other assets.
Loss Severity (%): The percentage of the loan exposure that is lost after accounting for the recovery rate. It is calculated as 100% – Recovery Rate.
LGD (Amount): The actual monetary value lost by the lender when a borrower defaults, calculated by applying the loss severity to the expected exposure.

Conversion Formula

The LGD calculation is straightforward:

This formula ensures that financial institutions can quantify losses both in terms of percentages and exact monetary values.

Examples of LGD Calculations

Example 1

Recovery Rate: 40%

Expected Exposure: $20,000

Loss Severity = 100 – 40 = 60%

✅ So, the lender loses $12,000 if the borrower defaults.

Example 2

Recovery Rate: 65%

Expected Exposure: $50,000

Loss Severity = 100 – 65 = 35%

✅ The lender incurs a loss of $17,500 in this case.

Example 3

Recovery Rate: 55%

Expected Exposure: $25,000

Loss Severity = 100 – 55 = 45%

✅ The calculated LGD amount is $11,250, reflecting the lender’s potential loss.

These examples highlight how recovery rates drastically impact financial outcomes. Even small changes in recovery can significantly reduce or increase total losses.

Features of Our Loss Given Default (LGD) Calculator

Who Should Use This Calculator?

Why Use an Online LGD Calculator?

Manual LGD calculation can be time-consuming and prone to human error, especially when dealing with large portfolios. With our Loss Given Default Calculator, you get:

Practical Applications of LGD