LGD Calculator - Credit Loss Severity

An lgd calculator estimates loss given default: the share of exposure a lender would lose if a borrower defaults after recoveries and collection costs are considered. Use it for credit-risk reviews, portfolio stress discussions, loan workout scenarios, allowance model support, or a quick check of how collateral recovery changes loss severity.

• • Credit review: Compare exposure at default with expected recovery so the severity of a default is visible before a lending decision is finalized.
• • Workout planning: Test how legal fees, collateral-sale costs, and delayed recovery cash flows affect the net loss estimate.
• • Portfolio sensitivity: Change PD, recovery, or timing assumptions to see how expected loss moves across similar loans or counterparties.
• • Model documentation: Create a transparent arithmetic check that can sit beside a larger internal credit-risk or allowance model.

LGD is a severity measure, not a probability measure. It answers what portion of the exposure is lost if default has already happened. Probability of default answers how likely default is over a selected horizon. This page includes PD only to show expected loss as a companion output.

The calculator is intentionally simple. It does not replace a bank's internal rating system, accounting policy, regulatory capital model, or collateral valuation process. Treat the result as an arithmetic scenario that must be reconciled with the source data, borrower facts, lien position, documentation, and recovery assumptions.

When default severity is being reviewed beside market compensation for credit risk, the Credit Spread Calculator gives a separate bond-yield spread view.

This lgd calculator starts with exposure at default, subtracts recoveries net of workout costs, discounts delayed recoveries, and divides the remaining loss by EAD.

• EAD: Exposure at default, or the outstanding amount exposed when the borrower defaults.
• Net recovery: Gross recoveries minus direct workout, collection, legal, servicing, or collateral-sale costs.
• Discounted recovery: Net recovery brought back to the default date when recoveries arrive after default.
• PD: Probability of default over the selected horizon, used only for the expected loss output.

The primary result is shown as a percent of exposure at default. A 60% LGD means the loss equals 60 cents for each dollar of EAD. The recovery rate is the companion percentage, based on discounted net recovery divided by EAD. When costs exceed recoveries, recovery rate can become negative and LGD can rise above 100%.

Expected loss combines frequency and severity. If EAD is $100,000, LGD is 62.96%, and PD is 2%, expected loss is $1,259.26. That output is useful for scenario comparison, but it should not be read as an accounting allowance or regulatory capital requirement by itself.

According to Basel Framework CRE36, loss given default is measured relative to exposure at default, and recoveries should be considered net of material direct and indirect collection costs.

If the exposure amount needs to be estimated from an amortizing loan schedule first, the Loan Balance Calculator can help size the balance before it becomes EAD.

These credit-risk terms keep the LGD result from being confused with other loan metrics.

LGD often looks like one percentage, but it is built from several judgments. The recovery amount depends on collateral value, lien priority, credit support, sale timing, market depth, borrower cooperation, and legal process. A small change in recovery assumptions can move the loss percentage materially.

Use consistent definitions when comparing loans. If one file uses gross collateral value and another uses discounted net sale proceeds, the two LGD percentages are not comparable. The same rule applies to PD horizon, default definition, discount rate, and the date used for EAD.

For a borrower-level leverage check that sits upstream of default severity, the Debt to Asset Calculator compares debt with asset support.

Enter the credit exposure and recovery assumptions, then read LGD beside recovery rate and expected loss.

1. 1 Enter EAD: Use the exposure amount tied to the default date or scenario, not the original loan amount unless they are the same.
2. 2 Enter gross recovery: Use expected collateral proceeds, cash collections, guarantor payments, or other recoveries before direct workout costs.
3. 3 Subtract workout costs: Include material collection, legal, servicing, appraisal, and sale costs that reduce net recovery.
4. 4 Set timing assumptions: Use the recovery lag and discount rate when recoveries are expected after the default date.
5. 5 Review PD separately: Enter PD only if you want expected loss; LGD itself describes severity assuming default occurs.
6. 6 Document the scenario: Save the recovery basis, valuation date, lien assumptions, and data source before comparing the output with another exposure.

For a commercial loan with $250,000 EAD, $175,000 gross recovery, $10,000 workout costs, no lag, and 5% PD, the calculator returns 34% LGD and $4,250 expected loss. That is a cleaner severity review than comparing the $85,000 loss amount alone.

When the scenario also depends on whether operating cash flow can cover debt service, the DSCR Calculator provides a borrower coverage check.

A transparent LGD worksheet helps separate credit severity from borrower probability and loan pricing.

• • Clear severity view: The result shows how much of EAD remains exposed after expected recovery, instead of hiding severity inside a total loss estimate.
• • Recovery sensitivity: Changing recoveries, costs, or lag shows which assumption drives the loss percentage most.
• • Expected loss bridge: Adding PD connects LGD to expected loss without mixing the two concepts.
• • Workout discipline: Showing direct costs beside recovery proceeds makes collection economics easier to review.
• • Comparable scenarios: Using the same EAD, discount, and net-recovery method across exposures makes portfolio comparisons easier to audit.

This lgd calculator structure is useful when a team is comparing several possible actions. A faster collateral sale may produce lower gross proceeds but a shorter recovery lag. A slower legal process may improve gross recovery but add costs and discounting. LGD makes those tradeoffs visible.

The result also supports clearer communication. Credit officers, finance teams, and management can see whether the discussion is about borrower default probability, collateral recovery, workout cost, or the amount exposed at default.

LGD is highly sensitive to recovery assumptions, timing, and the definition of economic loss.

• • This calculator uses one recovery cash flow and one discount rate; real workout models may use several cash flows, multiple collateral sources, and scenario weights.
• • A regulatory, CECL, or IFRS credit-loss model may require methods, controls, segmentation, forecasts, and documentation that go beyond this arithmetic worksheet.

Do not treat a single LGD scenario as a final answer for a portfolio. It is better used as a transparent checkpoint: are the recovery assumptions net of costs, discounted to the right date, and tied to the same EAD definition?

For reporting or regulatory work, reconcile this result to policy-approved data and model governance. The calculator can highlight arithmetic, but it cannot verify collateral files, legal enforceability, borrower-specific facts, or required accounting disclosures.

According to Basel Committee LGD guidance, LGD estimates should reflect economic downturn conditions where needed, and recovery cash flows used in LGD estimation require discounting.

According to FASB credit losses overview, expected credit losses are measured using historical experience, current conditions, and reasonable and supportable forecasts.

For institution-level liquidity context around stressed cash needs, the LCR Calculator reviews high-quality liquid assets against net cash outflows.