Loss Given Default

Loss given default (LGD) is the share of an exposure that is expected to be lost if the borrower defaults, after considering recoveries from collateral, guarantees, restructurings, or other workout actions.

Why It Matters

LGD matters because default alone does not tell a lender how severe the loss will be. Two loans can have the same probability of default but very different expected losses if one has strong collateral and the other does not.

How It Works in Finance Practice

The standard logic is:

Higher LGD means more severe loss if default occurs. Lower LGD means more of the exposure is expected to be recovered.

| Metric | What it captures |

| — | — |

| Probability of Default (PD)") | Likelihood that default happens |

| Exposure at Default (EAD)") | Amount exposed when default happens |

| Loss Given Default (LGD) | Portion of exposure lost once default happens |

Practical Example

If a lender is exposed to $100,000 when a borrower defaults and later recovers $40,000 through collateral liquidation, the LGD is 60%. That means 60% of the exposure became economic loss.

LGD is not the same as recovery rate

Recovery rate measures the portion recaptured after default. LGD is the complementary loss side. Higher recovery rate usually implies lower LGD.

LGD is a severity measure, not a default-probability measure

LGD says nothing by itself about how likely default is. It only measures how bad the loss is if default occurs.

Related Terms

• Recovery Rate: Recovery-side complement to LGD.

• Probability of Default (PD)"): Likelihood of default.

• Exposure at Default (EAD)"): Dollar exposure present at default.

• Default Rate: Portfolio measure of how many loans reach default.

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