Loss Given Default Calculator

Understanding Loss Given Default (LGD)

Loss Given Default (LGD) is a key risk metric in credit risk modeling and financial risk management. It represents the percentage or dollar amount of funds lost when a borrower defaults on a loan or credit obligation. LGD is one of the three core parameters used in Basel capital frameworks alongside Probability of Default (PD) and Exposure at Default (EAD).

How to Calculate Loss Given Default

The Loss Given Default percentage is calculated as:

$$\text{LGD (\%)} = 100\% - \text{Recovery Rate (\%)}$$

Where the recovery rate can be derived from gross collateral liquidation minus recovery expenses:

$$\text{Recovery Rate (\%)} = \frac{\text{Gross Recovered Amount} - \text{Recovery Costs}}{\text{Exposure at Default (EAD)}} \times 100$$

Expected Credit Loss (EL) Formula

Financial institutions calculate Expected Loss across credit portfolios using:

$$\text{EL} = \text{EAD} \times \text{PD} \times \text{LGD}$$