LGD Calculator - Loss Given Default
Enter an exposure amount and either a recovery rate or a loss severity percentage to find your Loss Given Default. Add a Probability of Default and you get the full Expected Credit Loss (ECL) used in Basel III capital frameworks. The calculator works both ways: input the recovery rate and it derives the loss severity, or vice versa. Results update as you type and the step-by-step panel shows every calculation.
What is Loss Given Default (LGD)?
Loss Given Default (LGD) is the fraction of a loan or bond exposure that a lender expects to lose permanently if the borrower defaults. It is expressed as a percentage and is the complement of the recovery rate: an LGD of 40% means the lender expects to recover 60 cents on the dollar through collateral liquidation, legal proceedings, or restructuring. LGD is one of the three core parameters in the Basel III credit-risk framework alongside Probability of Default (PD) and Exposure at Default (EAD). Together they produce Expected Credit Loss (ECL = EAD x PD x LGD), the loss provision that banks must hold under both Basel III regulatory capital rules and IFRS 9 / CECL accounting standards.
How to use this calculator
Start by entering the Exposure at Default (EAD), which is the total outstanding amount at risk. Then choose whether you want to enter a recovery rate or a loss severity directly - either way the calculator derives the other value automatically. If you also know the annual Probability of Default, turn on the Expected Credit Loss toggle and enter it to get the full ECL figure. The steps panel below the result shows every arithmetic step with your actual numbers substituted in, so you can trace the calculation exactly. The LGD severity gauge and the loss-vs-recovery bar chart give an instant visual sense of the split between what is at risk and what is protected.
LGD formulas and calculation methods
The fundamental relationship is: LGD (%) = 1 - Recovery Rate (%). In dollar terms, LGD Amount = EAD x LGD%. The full Expected Credit Loss formula is ECL = EAD x PD x LGD, which is used in Basel III Pillar 1 minimum capital requirements and in IFRS 9 Stage 1/2/3 loss allowance calculations. Three estimation methods appear in practice. Market LGD uses secondary market prices of defaulted bonds shortly after default; recovery is observed from the discounted market price. Workout LGD tracks all cash flows from default to resolution (asset sales, legal costs, time value of money) and calculates present-value-weighted recovery. Implied market LGD backs out an implied LGD from credit spreads using a structural or reduced-form model. This calculator implements the direct formula approach suitable for loan-level provisioning and credit risk analysis.
What drives LGD: collateral, seniority, and haircuts
The biggest determinant of LGD is collateral quality and how quickly it can be converted to cash under distress. Financial collateral such as government bonds can be liquidated rapidly with minimal haircut, often driving LGD close to zero. Residential real estate typically supports recovery rates of 60-90%, but commercial real estate is more volatile. Equipment and receivables face larger distress-sale haircuts. Beyond collateral, seniority in the capital structure matters enormously: senior secured creditors recover before subordinated lenders, so sub-debt holders frequently face LGDs of 60-80%. The legal system also matters - jurisdictions with efficient insolvency regimes (United States Chapter 11, UK administration) historically produce higher recoveries than those with slower processes.
Typical LGD ranges by exposure type
| Exposure type | Typical LGD range | Recovery rate range | Risk level |
|---|---|---|---|
| Senior secured (financial collateral) | 0-20% | 80-100% | Low |
| Senior secured (real estate) | 10-35% | 65-90% | Low-Moderate |
| Senior secured (equipment/receivables) | 20-40% | 60-80% | Moderate |
| Senior unsecured corporate | 40-55% | 45-60% | Moderate-High |
| Subordinated corporate debt | 55-75% | 25-45% | High |
| Unsecured retail | 50-70% | 30-50% | High |
| Junior / mezzanine debt | 65-85% | 15-35% | Very High |
| Equity / deeply subordinated | 80-100% | 0-20% | Very High |
Indicative LGD ranges used in Basel II/III internal ratings-based (IRB) approaches. Actual values depend on collateral quality, seniority, and jurisdiction.
Frequently asked questions
What is a typical LGD for unsecured corporate loans?
Under the Basel II/III Foundation Internal Ratings-Based (F-IRB) approach, regulators assign a supervisory LGD of 45% for senior unsecured corporate exposures and 75% for subordinated exposures. Advanced IRB banks estimate their own LGDs from historical data, and empirical studies generally find average senior unsecured LGDs in the 40-55% range for investment-grade corporates, rising sharply for speculative-grade and distressed borrowers.
How does LGD differ from EAD and PD?
Probability of Default (PD) answers: how likely is the borrower to default? Exposure at Default (EAD) answers: how large will the outstanding amount be if they do? LGD answers: of that outstanding amount, how much is permanently lost? All three are inputs to Expected Credit Loss: ECL = PD x EAD x LGD. Each parameter captures a separate dimension of credit risk and is estimated independently before being combined.
What is the difference between LGD and loss severity in bond markets?
In bond markets, loss severity and LGD mean the same thing - both equal 1 minus the recovery rate. Bond recovery rates are typically observed from secondary market prices of defaulted bonds 30 days after default, a convention that makes them easy to compare across issuers. The academic literature uses LGD more often; bond-market practitioners tend to use recovery rate and loss severity interchangeably.
Does LGD apply to retail as well as corporate exposures?
Yes. LGD applies to any credit exposure including mortgages, auto loans, credit cards, and personal loans. Retail LGDs can be estimated from pools of similar loans rather than borrower-by-borrower. Mortgages secured by residential real estate often have LGDs of 10-30% when property values are stable, but mortgage LGDs can spike sharply during housing downturns because falling collateral values and forced-sale discounts both reduce recoveries at the same time.
How is LGD used in IFRS 9 expected loss calculations?
Under IFRS 9, financial institutions must recognize expected credit losses on all financial assets. Stage 1 (performing) assets require a 12-month ECL (PD over 12 months x LGD x EAD). Stage 2 (significant increase in credit risk) and Stage 3 (credit-impaired) assets require lifetime ECL, integrating forward-looking PDs and LGDs over the full remaining life of the instrument. LGD is a core input at every stage, and must reflect current and forecast economic conditions rather than through-the-cycle averages.