LGD Calculator (loss given default, recovery rate & expected loss)

Understanding the loss given default (LGD) calculator — concept and principle

Loss given default (LGD) is the share of a loan or exposure that a lender loses when the borrower defaults, after recoveries and collection costs. Banks, credit analysts and students of credit risk use it with the probability of default (PD) and exposure at default (EAD) to estimate expected credit losses.

Recoveries of $62,000 minus $7,000 of costs leave a $45,000 loss, an LGD of 45%; with PD 2% the expected loss is $900.

How it is calculated

Loss amount = EAD − recoveries + collection costs (never below zero).
LGD = loss amount ÷ EAD, shown as a percentage.
Recovery rate (net of costs) = 100% − LGD.
Expected loss EL = PD × LGD × EAD; expected loss rate = PD × LGD.

The principle

When a borrower defaults, the lender rarely loses everything. It sells collateral, calls on guarantees or negotiates a workout, but each step costs money for lawyers, valuers and sales. LGD captures the net outcome as a fraction of what was owed. Multiplying it by the probability of default and the exposure gives the average loss you would expect across many similar loans, which is the basis for loan pricing and provisions. Under the Basel framework, the foundation approach assigns supervisory LGDs (for example 45% for senior unsecured claims on banks and sovereigns, 40% for other corporates and 75% for subordinated claims), while banks using the advanced approach estimate their own.

Worked example

Default inputs: EAD 100,000 USD, recoveries 62,000 USD, collection costs 7,000 USD, PD 2%.

Loss = 100,000 − 62,000 + 7,000 = 45,000 USD.
LGD = 45,000 ÷ 100,000 = 45%; net recovery rate = 55%.
Expected loss = 2% × 45,000 = 900 USD.
Expected loss rate = 2% × 45% = 0.9% of the exposure.

Each point is the calculator re-run with only “Amount recovered (collateral, guarantees, workout)” changed; the gold point is the default example. Change the inputs above and this chart follows your numbers.

Amount recovered (collateral, guarantees, workout)	Loss given default (LGD)
15,500	91.5%
31,000	76%
46,500	60.5%
62,000	45%
77,500	29.5%
93,000	14%
124,000	0%

How to read the result

Secured loans with good collateral usually have low LGDs; unsecured and subordinated debt have high ones. A 0.9% expected loss rate means the lender should, on average, price or reserve at least that much per year of exposure on similar loans. LGD varies with the economic cycle: in recessions collateral sells for less and recoveries take longer.

Common mistakes

Ignoring collection costs, which understates the loss.
Forgetting that recoveries arriving years later are worth less today; this simple version does not discount them.
Mixing up LGD with the recovery rate (they add up to 100%).
Using a PD for a different time horizon than one year.

Keep in mind: This is a simplified, undiscounted measure for learning and quick estimates. Regulatory LGD models require discounting, downturn calibration and validation; this is not financial or regulatory advice.

Frequently asked questions

What is a typical LGD?

It depends on seniority and collateral. Basel's foundation approach uses 45% for many senior unsecured exposures as a supervisory benchmark.

What is the difference between LGD and EAD?

EAD is how much is owed at default; LGD is the percentage of that amount that is lost.

How does LGD relate to IFRS 9?

Expected credit loss under IFRS 9 is built from PD, LGD and EAD, using forward-looking and discounted estimates.

Sources: Basel Committee on Banking Supervision, The Basel Framework, CRE32 (IRB approach: risk components) · IFRS 9 Financial Instruments, Section 5.5 (impairment)

Checked 9 Nov 2026. Basel Committee on Banking Supervision, Basel Framework CRE32 “IRB approach: risk components” (LGD as a percentage of EAD, CRE32.15; supervisory LGDs 45%, 40% and 75%, CRE32.6–32.7). Expected loss = PD × LGD × EAD: standard credit-risk formula.

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