Loss Given Default (LGD)

The share of a loan's value that is lost when a borrower defaults, after recoveries.

Example

If 20% of a defaulted loan is recovered, LGD is 80%.

Important

Recoveries fall in downturns when collateral values drop, so LGD also worsens exactly when defaults rise.

Related terms

• Probability of Default (PD) — The likelihood that a borrower fails to repay within a given period, usually a year.
• Recovery rate — The proportion of a claim a creditor actually receives after a default, once the borrower's assets have been realised and distributed in rank order.
• Expected Loss — The average loss a lender anticipates on a loan portfolio, calculated as probability of default times loss given default times exposure.

Lessons that explain it

• Interest minus expected losses minus fees — A lending return is the interest collected, less the share of principal lost to defaults after recoveries, less fees. Expected loss is the number the headline rate leaves out. (12 min)

All 578 terms in the Investing glossary