Loss Given Default (LGD) Calculator
Calculate Loss Given Default (LGD) amount and percentage for credit risk assessment. Enter exposure at default and recovery rate to measure potential loss with charts and breakdown.
About This Calculator
The Loss Given Default (LGD) Calculator helps investors, credit analysts, and banking professionals measure the potential financial loss when a borrower defaults on a loan or debt obligation. LGD is a critical component of credit risk management under the Basel regulatory framework, used alongside Probability of Default (PD) and Exposure at Default (EAD) to calculate expected and unexpected losses.
How It Works
LGD is calculated using the formula: LGD = Expected Exposure × (1 - Recovery Rate). The recovery rate represents the percentage of the exposure you expect to recover through collateral liquidation, debt restructuring, or legal proceedings. The loss severity is simply 100% minus the recovery rate. For example, with a ₹10,00,000 exposure and 80% recovery rate, the LGD would be ₹2,00,000 (20% of exposure).
Who Should Use This Calculator
This tool is designed for credit risk professionals at banks and financial institutions, investors analyzing corporate bond or loan investments, financial analysts assessing counterparty risk, business owners evaluating customer credit risk, and students learning about credit risk management and Basel regulations.
Regional Notes
India: Banks use LGD estimates under Basel III guidelines from RBI. Recovery rates for secured loans average 40-60% under the SARFAESI Act, while unsecured loans have lower recovery. The Insolvency and Bankruptcy Code (IBC) has improved recovery timelines.
United States: US banks follow FDIC and Federal Reserve Basel III rules. Senior secured debt typically has 60-80% recovery rates. Chapter 11 bankruptcy proceedings affect recovery timelines and amounts. Moody's and S&P publish annual recovery rate studies.
United Kingdom: UK banks follow PRA Basel III requirements. Insolvency Act 1986 governs recovery proceedings. Average recovery rates for secured creditors range from 50-70%. The Bank of England publishes credit risk statistics for the UK banking sector.
Applications in Banking
Banks use LGD in several critical processes: calculating regulatory capital under the Internal Ratings-Based (IRB) approach, pricing loans and credit products to reflect risk, setting loan loss provisions under IFRS 9 / IND AS 109, determining credit limits and collateral requirements, and stress testing portfolio resilience under adverse economic scenarios.
Frequently Asked Questions
What is Loss Given Default (LGD)?
Loss Given Default (LGD) is the percentage of total exposure that is lost when a borrower defaults on a loan. It is calculated as LGD = Expected Exposure × (1 - Recovery Rate). For example, if you have a ₹1,000,000 exposure with an 80% recovery rate, the LGD is ₹200,000.
How is LGD calculated?
LGD is calculated by multiplying the expected exposure by the loss severity. Loss severity equals 100% minus the recovery rate. So LGD = Exposure × (100% - Recovery Rate). The recovery amount is Exposure minus LGD.
What is a good LGD percentage?
A lower LGD percentage is better as it means less loss in case of default. Secured loans (like mortgages) typically have lower LGD (20-40%) due to collateral, while unsecured loans (like credit cards) have higher LGD (60-80%).
How is LGD used in Basel III regulations?
Under Basel III, banks use LGD along with Probability of Default (PD) and Exposure at Default (EAD) to calculate Regulatory Capital requirements. The formula is: Expected Loss = PD × EAD × LGD. Banks must hold capital against unexpected losses.
What factors affect the recovery rate?
Recovery rates are affected by collateral quality and value, seniority of debt (senior secured recovers more than subordinated), industry conditions, economic cycle, legal framework for bankruptcy, and the time and cost of recovery proceedings.
What is the difference between LGD and expected loss?
LGD measures the percentage of exposure lost given a default has occurred, while Expected Loss (EL) multiplies LGD by the Probability of Default (PD) and Exposure at Default (EAD). EL = PD × EAD × LGD accounts for both the likelihood and severity of default.
How do recovery rates differ across regions?
In the US, average recovery rates for senior secured debt range from 60-80%, while unsecured debt recovers 30-50%. In India, recovery rates average 40-60% for secured loans under the SARFAESI Act. UK recovery rates under insolvency proceedings average 50-70% for secured creditors.
Can LGD be zero?
Theoretically yes, if the borrower has sufficient assets to fully repay all debt obligations after default. In practice, this is rare as recovery proceedings involve legal costs, time delays, and asset depreciation that reduce the net recovery amount.