LGD Calculator (Loss Given Default)

The LGD Calculator (Loss Given Default) converts a credit-loss severity assumption into a dollar loss and a recovery amount. Enter the expected exposure and either the recovery rate or the loss severity. The calculator then shows the loss given default, expected recovery, recovery rate, and loss severity. It is built for credit analysts, lenders, fixed-income investors, workout teams, and risk managers who need a transparent severity calculation before layering in probability of default.

LGD is one component of credit risk. It answers the question, “If default occurs, how much of the exposure is lost after recoveries?” It does not answer whether default will happen. If you are reviewing borrower affordability, pair this result with the debt to income calculator. If you are modeling the loan economics, use the loan calculator. If you are evaluating borrower liquidity or covenant strength, the current ratio calculator can support the qualitative side of the analysis.

What the form calculates

The form starts with Known rate, a segmented control with two choices: recovery rate or loss severity. If you choose recovery rate, the calculation method subtracts that percentage from 100 to obtain severity. If you choose loss severity, it uses that percentage directly and calculates recovery rate as the remainder. The expected exposure is the balance at risk if default happens. The calculator accepts nonnegative exposure and rates between 0% and 100%.

The primary result is the dollar loss given default. The items beneath it show expected exposure, loss severity, recovery rate, and expected recovery. The tone changes when severity is high, but the math does not: loss is always exposure times severity.

Formula

When recovery rate is the known input:

$\text{loss severity} = 100\% - \text{recovery rate}$

When loss severity is the known input:

$\text{recovery rate} = 100\% - \text{loss severity}$

The dollar LGD is:

$\text{loss given default} = \text{expected exposure} \times \frac{\text{loss severity}}{100\%}$

Expected recovery is the complementary amount:

$\text{expected recovery} = \text{expected exposure} - \text{loss given default}$

Worked example using the default recovery input

The default mode is Recovery rate. The default recovery rate is 80%, and the default expected exposure is $1,000,000. The calculator first converts recovery into severity:

$\text{loss severity} = 100\% - 80\% = 20\%$

It then multiplies exposure by severity:

$\text{loss given default} = \$1{,}000{,}000 \times \frac{20\%}{100\%} = \$200{,}000$

Expected recovery is the remainder:

$\text{expected recovery} = \$1{,}000{,}000 - \$200{,}000 = \$800{,}000$

The result panel therefore reports $200,000 as loss given default, 20% loss severity, 80% recovery rate, and $800,000 expected recovery. If you switch the known rate to Loss severity and enter 20%, the output is the same because the calculation method treats severity as the direct input and calculates recovery rate as 80%.

How LGD is used

In expected loss analysis, LGD is usually combined with probability of default and exposure at default. A portfolio manager might model expected credit loss as probability of default times exposure times LGD rate. This calculator supplies the severity piece. It is also useful for scenario testing: a secured loan might have low severity in a normal market but much higher severity if collateral values fall, liquidation takes longer, or legal costs rise.

Workout teams use LGD to compare recovery strategies. A quick collateral sale may produce cash sooner but at a lower price. A restructuring may preserve value but increase time and uncertainty. Investors use LGD assumptions to compare bonds with different seniority, collateral packages, and covenant protections. Senior secured debt often has lower LGD than deeply subordinated debt, but no label guarantees a recovery.

Caveats and modeling discipline

Recovery is not just collateral value divided by loan balance. Timing, jurisdiction, bankruptcy costs, guarantees, documentation, liens, market liquidity, taxes, and borrower cooperation can all change realized recovery. LGD can also be cyclical. During downturns, defaults may rise at the same time collateral prices fall, creating higher realized severity than a benign historical average suggests.

Regulatory guidance reflects that concern. Basel materials discuss loss given default estimation and downturn conditions, while Federal Reserve and interagency guidance emphasizes relevant historical data and conservative parameter estimation when data are limited. For a small-business loan or private credit exposure, you may not have a large recovery database. In that case, document the assumption, test more severe cases, and avoid presenting a single LGD as precise.

This calculator deliberately does not subtract fees, tax effects, or the time value of delayed recoveries unless you include them in the recovery assumption. If recoveries arrive years later, a present-value LGD may be higher than the nominal LGD shown here. Use the output as the mechanical severity estimate, then adjust your credit memo or model for timing and collection costs.

Sources

• Basel Committee on Banking Supervision, Guidance on the estimation of loss given default — supervisory discussion of LGD estimation and downturn considerations.
• Bank for International Settlements, Basel III: Finalising post-crisis reforms — regulatory context for credit-risk parameters including LGD.
• Federal Reserve, Guidance on selection of reference data periods — guidance for estimating credit-risk parameters with relevant data.
• Federal Reserve, Credit Risk Models — stress-test model documentation involving credit losses and recoveries.