Credit · Core
Loss Given Default
LGD is 1 minus recovery — the fraction of exposure lost when default happens.
Definition
LGD = 1 − recovery (sometimes discounted). Basel and internal models treat it as a risk parameter with downturn LGD higher than average. Facility, collateral, and workout cost all sit inside.
Why it matters
Expected loss = PD × LGD × EAD. Missing LGD is how a ‘low PD’ book still blows up.
Case
A ‘secured’ loan with a second lien on stale inventory. Model LGD was 20; workout LGD was 70. The security was a word.
How to read it
Downturn LGD, collateral valuation, and whether the model was fitted on a benign sample.
No query has been run yet. Which is tragically normal for most knowledge systems, but we are trying to evolve past decorative databases.