how to calculate lgd
there are a number of different ways to calculate lgd a common variation considers the exposure at risk and recovery rate exposure at default is an estimated value that predicts the amount of loss a bank may experience when a debtor defaults on a loan the recovery rate is a risk adjusted measure to right size the default based on the likelihood of the outcome lgd in dollars exposure at risk ead 1 recovery rate another basic variation compares the potential net collectible proceeds to the outstanding debt this formula provides a general ratio of what portion of debt is expected to be lost lgd as percentage 1 potential sale proceeds outstanding debt of these two methods it is more common to see the first formula be used as it is more conservative approach to reflect the maximum potential loss it can often be difficult to assess what the potential sale proceeds are especially considering multiple collateral assets disposition costs timing of payments and liquidity of each asset loss given default lgd vs exposure at default ead exposure at default is the total value of a loan that a bank is exposed to when a borrower defaults for example if a borrower takes out a loan for 100 000 and two years later the amount left on the loan is 75 000 and the borrower defaults the exposure at default is 75 000 