FRM Glossary · Part II · Credit Risk

Loss Given Default (LGD)

The fraction of exposure that is lost when a borrower defaults, after collateral and recovery are considered — 1 minus recovery rate.

In more detail

LGD = 1 − recovery rate. Senior secured loans have low LGD (~25–40%); subordinated debt has high LGD (often 70–100%). LGD is a parameter, not a random variable, in regulatory capital but is modelled stochastically for economic capital and pricing.