when analyzing default risk banks will often calculate the ead on a loan as it aims to predict the amount the bank will be exposed to when a borrower defaults exposure at default constantly changes as a borrower pays down their loan 
depending on the loan such as a mortgage or student loan there are a different number of days passed without payment that counts as a default make sure you are aware of the figure for your specific loan the main difference between lgd and ead is that lgd takes into consideration any recovery on the default for this reason ead is the more conservative measurement as it is the higher figure lgd is more often the best case scenario that relies on multiple assumptions for example if a borrower defaults on their remaining car loan the ead is the amount of the loan left they defaulted on now if a bank can then sell that car and recover a certain amount of the ead that will be taken into consideration to calculate lgd example of loss given default lgd imagine a borrower takes out a 400 000 loan for a condo after making installment payments on the loan for a few years the borrower begins to face financial difficulties it is estimated that the borrower has an 80 chance of default which means the recovery rate is 20 the outstanding loan balance is 300 000 and the bank will be able to sell the condo for 200 000 upon foreclosure to calculate the lgd in dollars compare the amount at risk to the likelihood of default in this situation the lender interprets 240 000 at risk of default lgd in dollars omitting collateral 300 000 1 0 20 240 000alternatively lgd can be calculated as a percentage that typically incorporates the value of the collateral although the formula above is easier to calculate it did not factor in the disposition proceeds of the condo in the event of default using the second variation the lender should anticipate losing 33 of their capital should the condo owner default when considering the collateral value lgd as percentage including collateral 1 200 000 300 000 33 33 