what is loss given default lgd 
loss given default lgd is the estimated amount of money a bank or other financial institution loses when a borrower defaults on a loan lgd is depicted as a percentage of total exposure at the time of default or a single dollar value of potential loss a financial institution s total lgd is calculated after a review of all outstanding loans using cumulative losses and exposure understanding loss given default lgd banks and other financial institutions determine credit losses by analyzing actual loan defaults quantifying losses can be complex and require an analysis of several variables how credit losses are accounted for on a company s financial statements include determining both an allowance for credit losses and an allowance for doubtful accounts consider if bank a lends 2 million to company xyz and the company defaults bank a s loss is not necessarily 2 million other factors must be considered such as the amount of collateral whether installment payments have been made and whether the bank makes use of the court system for reparations from company xyz with these and other factors considered bank a may in reality have sustained a far smaller loss than the initial 2 million loan determining the amount of loss is an important and fairly common parameter in most risk models lgd is an essential component of the basel model basel ii a set of international banking regulations as it is used in the calculation of economic capital expected loss and regulatory capital the expected loss is calculated as a loan s lgd multiplied by both its probability of default pd and the financial institution s exposure at default ead loans with collateral known as secured debt greatly benefit the lender and can benefit the borrower through lower interest rates 