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Loss Given Default (LGD)

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Learning Objectives


By the end of this module, you will be able to:

Understand Purpose and Role of LGD in Commercial Lending

Understand Loss Given Default as a measure of potential loss if a borrower defaults.

Recognise the relationship between LGD, security, recovery outcomes and overall credit risk.

Understand that LGD complements Probability of Default by assessing the potential severity of loss.

Evaluate Key LGD Drivers and Recovery Assumptions

Assess key LGD drivers, including security value, collateral coverage, recovery costs and realisation assumptions.

Consider how asset quality, marketability, priority and enforceability may affect recovery.

Identify assumptions that may be overly optimistic or require further evidence.

Assess Security Coverage and Recovery Risk

Evaluate whether available security provides sufficient coverage relative to the lender’s exposure.

Assess how valuation changes, competing claims or enforcement limitations may affect recoverability.

Identify factors that may increase potential loss following default.

Assess Changes in LGD and Risk Mitigation

Consider how changes in security value, exposure or recovery assumptions may affect LGD.

Apply sensitivity analysis to assess the impact of weaker recovery outcomes.

Identify appropriate risk mitigants where recovery outcomes may be weaker than expected.

Apply LGD Analysis to Credit Assessment

Apply LGD analysis to practical commercial credit scenarios.

Integrate LGD findings with security analysis, Probability of Default and broader credit risk.

Use LGD insights to support balanced and well-reasoned credit recommendations.