Loss given default (LGD)

LGD is the severity half of expected credit loss: PD says how likely a default is, LGD how much it will cost. This guide explains how LGD is calculated for secured and unsecured exposures, why even well-secured loans have an LGD above zero, and how historical workout LGDs are measured.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Loss given default (LGD) is the share of the exposure a lender expects to lose if a borrower defaults, after recoveries from collateral, guarantees and the borrower, net of costs and discounted for the time recovery takes. LGD = 1 - recovery rate. For a secured loan it depends mainly on the collateral's realisable value; for unsecured lending, on historical recovery rates. In this guide's example, a 1,000,000 loan secured on property worth 800,000 has an LGD of 42.8%.

At a glance

Measures
Share of EAD lost on default
Formula
1 - present value of recoveries / EAD
Secured loans
Collateral value, haircut, costs, timing
Unsecured loans
Historical recovery rates
Discount rate
Effective interest rate
Excel
LGD calculator
Loss given default (LGD)Measures: Share of EAD lost on default; Formula: 1 - present value of recoveries / EAD; Secured loans: Collateral value, haircut, costs, timing; Unsecured loans: Historical recovery rates; Discount rate: Effective interest rate; Excel: LGD calculator.KEY FACTS AT A GLANCELoss given default (LGD)MeasuresShare of EAD lost ondefaultFormula1 - present value ofrecoveries / EADSecured loansCollateral value,haircut, costs, timingUnsecured loansHistorical recovery ratesDiscount rateEffective interest rateExcelLGD calculatorTax BakersLoss given default (LGD)Measures: Share of EAD lost on default; Formula: 1 - present value of recoveries / EAD; Secured loans: Collateral value, haircut, costs, timing; Unsecured loans: Historical recovery rates; Discount rate: Effective interest rate; Excel: LGD calculator.KEY FACTS AT A GLANCELoss given default (LGD)MeasuresShare of EAD lost on defaultFormula1 - present value of recoveries / EADSecured loansCollateral value, haircut, costs, timingUnsecured loansHistorical recovery ratesDiscount rateEffective interest rateExcelLGD calculatorTax Bakers
Key facts at a glance, as set out in this guide.

What is loss given default?

If a borrower defaults owing 1,000,000 and the lender eventually recovers cash worth 600,000 in today's money, the loss given default is 40%. LGD is one of the three ECL parameters: ECL = PD x LGD x EAD. It is expressed as a percentage of exposure at default and reflects every source of recovery the lender expects: collateral, guarantees that are part of the contract, and payments from the borrower or its liquidator.

A loss given default calculation for a secured loan

A loan of 1,000,000 is secured on property worth 800,000 today.

StepAmount
Property value 800,000 less a 20% haircut for a forced sale and a fall in value640,000
Less costs to repossess and sell, 5%(32,000)
Net recovery from collateral608,000
Recovery of 15% on the unsecured shortfall of 392,00058,800
Total recovered after 2 years666,800
Present value at the 8% effective interest rate571,674
LGD = 1 - 571,674 / 1,000,00042.8%
From exposure to lossFrom exposure to loss1,000,000Exposure-608,000Collateralrecovered-58,800Unsecuredrecovery+95,126Time valueof money428,326Loss
Loss of 428,326, an LGD of 42.8%.

Discounting alone adds about 10% to the LGD, because two years pass before the money comes in. The LGD calculator (Excel) shows how LGD changes with the collateral value: at 1,200,000 it falls to about 21%, but it never reaches zero.

How is LGD estimated for unsecured exposures?

From the lender's history of recoveries on similar defaulted loans, or from external studies of recovery rates by seniority. Senior unsecured corporate debt has historically recovered somewhere around 40% on average, so LGDs of about 60% are common starting points, but recoveries vary widely by industry, jurisdiction and the state of the economy.

What is workout LGD?

Workout LGD is measured from loans that have actually defaulted: the recoveries received over the workout period, less direct costs, discounted back to the default date, compared with EAD. In the LGD calculator (Excel), six defaulted loans have realised LGDs from 31% to 84%, and an exposure-weighted average of 53%. The wide range is normal: some borrowers cure or are well secured, others recover almost nothing.

How is LGD made forward-looking?

IFRS 9 requires LGD to reflect current conditions and forecasts. For property-secured lending, lenders project collateral values under each economic scenario, often using house price or commercial property indices, so LGD rises in downside scenarios. Regulatory downturn LGDs and floors are not used directly for IFRS 9, because they are deliberately conservative.

How does LGD vary by collateral type?

Residential property usually gives the lowest LGDs, because values are relatively stable and markets liquid. Commercial property, vehicles and equipment lose value faster and cost more to sell, so haircuts are larger. Receivables and inventory pledged by a company can shrink quickly as the business fails. Cash collateral held by the lender gives an LGD close to zero.

How is LGD estimated in stage 3?

For defaulted loans, LGD is usually assessed individually for large exposures, using the expected proceeds from the collateral and the recovery strategy, and collectively for small ones, using recovery curves that show how much is typically collected after a given time in default. The longer a loan stays in default without recovery, the higher its LGD.

What are common LGD mistakes?

  • Using the current market value of collateral without a haircut for a forced sale.
  • Ignoring recovery costs and the time value of money.
  • Counting guarantees or insurance that are not part of the contractual terms; those are recognised separately.

See exposure at default, probability of default and how to calculate ECL.

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Questions people ask

What is loss given default?

The share of the exposure a lender expects to lose if the borrower defaults, after recoveries and costs, discounted to the default date.

How is LGD calculated?

LGD = 1 - present value of expected recoveries / exposure at default, using collateral values, haircuts, costs, recovery rates and the time to recover.

Can LGD be zero for a fully secured loan?

Rarely. Costs and the time taken to realise collateral usually leave some loss even when collateral exceeds the debt.

Which discount rate is used for LGD under IFRS 9?

The effective interest rate of the asset.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 9 Financial Instruments

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ECLExposure at default (EAD)ECLProbability of default (PD)ECLHow to calculate ECL, step by step

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This guide is general information. It is not tax or legal advice for your situation.