How do you calculate loss given default?

Take the amount owed at default, estimate what will be recovered from security and other sources after costs and prior-ranking claims, discount those recoveries to the default date, and divide by the amount owed. Loss given default is one minus that fraction. On US$1m owed with US$650,000 in present-value recoveries, it is 35%. A simple version leaves out discounting, which understates the loss whenever recovery takes time, as it usually does for a mortgage or a business sale.

What is a typical loss given default for a secured loan?

There is no typical figure worth carrying from file to file, because the answer depends on the asset, the ranking, the jurisdiction and how long enforcement takes. The Basel framework's supervisory 40% for senior unsecured corporate claims and its floors are capital settings, not estimates of any particular loan. A bank's own data, split by collateral type and ranking, is the proper guide, and it is usually kept private.

Can loss given default be more than 100%?

Yes, in principle. If nothing is recovered and the lender has also paid receivers, lawyers and valuers, its total loss is larger than the amount owed at default, and discounting adds to the effect on a slow recovery. At the other end, a well-secured loan can come close to zero, which is one reason the capital rules set floors on a bank's own estimates.

Why is loss given default estimated for a downturn?

Because defaults and weak asset prices tend to arrive together. When many borrowers fail in the same recession, the property and plant securing their loans are being sold into the same weak market, so the average loss across good and bad years understates the loss in the years when most defaults occur. The capital rules therefore ask a bank using its own estimates to reflect downturn conditions where they matter.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Loss Given Default: a Worked Example

Security worth 110% on the books can still lose 48 cents a dollar.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 5 MIN READ

// THE SHORT ANSWER

Before it takes security, a lender asks what it would get back if this went wrong, when, and after whom. Loss given default is the answer as a percentage: the part of the amount owed that is not recovered, once assets are sold at distressed prices, costs and prior claims are paid, and the wait is counted. A brick maker owing US$5.0m, with assets of US$5.5m on its balance sheet, produces a loss given default of 48%, and 56% if property falls further. The figure attaches to the facility, so one company's loans can carry very different ones.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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PART OF When Your Loan Goes to the Workout Team

// 01 — WHY COVER ON THE BOOKS IS NOT THE ANSWER

A balance sheet values assets on the assumption that the business carries on. Default ends that assumption. Stock is sold to whoever will take it, specialised plant finds few buyers, receivables are disputed the moment the supplier stops supplying, and the property is sold by a receiver to a buyer who knows why. A lender therefore reads security at forced-sale value and works down through everything that stands between that value and its own account.

Time counts as well. A dollar recovered eighteen months after default is worth less than a dollar on the day. The estimate that matters is the present value of what comes back.

// 02 — HOW IT IS CALCULATED

Recoveries = forced-sale proceeds − costs − prior claims

LGD = 1 − present value of recoveries ÷ exposure at default

Recovery rate = 1 − LGD

Banks build this from their own workout files, tracing what each failed loan returned and when. For traded debt, the price shortly after default offers another reading, though few mid-market loans have one.

The Basel framework has two routes for banks on internal ratings. Under the foundation approach the supervisor supplies the figure: 40% for senior unsecured claims on non-financial corporates, 45% for financial institutions, 75% for subordinated claims, with lower effective figures where recognised collateral is held. Under the advanced approach, which is closed to exposures to certain entities, the bank uses its own estimates, subject to floors of 25% unsecured and 0% to 15% secured depending on the collateral. These are Basel's numbers. Australia's accredited banks work under APRA's APS 113, New Zealand's under the Reserve Bank's IRB requirements, BPR134 among them, and the UK moves to its Basel 3.1 rules on 1 January 2027. A bank on the standardised approach uses no LGD in its capital sum, though it may estimate one for pricing.

Own-estimate LGD for capital must reflect downturn conditions where those matter and cannot be below the long-run default-weighted average. The accounting estimate under expected credit loss rules is unbiased and carries no regulatory downturn margin, so one facility can have two figures.

// 03 — THE EXAMPLE

A brick maker, constructed for this page like every figure in it, owes US$5.0m under a first mortgage and a general security agreement, and defaults. Its assets, in US$m:

Book Forced sale Realised

Land and kilns 3.20 70% 2.24

Plant 1.50 30% 0.45

Receivables 0.80 60% 0.48

Total 5.50 3.17

Receiver and sale costs (0.20)

Preferential claims (0.07)

Net cash to the bank 2.90

Received after 18 months, discounted at 8%:

2.90 ÷ 1.08^1.5 = 2.584

LGD = 1 − 2.584 ÷ 5.00 = 48.3%

No discounting: 1 − 2.90 ÷ 5.00 = 42.0%

Book view: 5.50 ÷ 5.00 = 110% cover = no loss

Three layers separate 110% cover from a 48% loss: the distressed prices take most of it, costs and preferential creditors take some, and the wait takes six points more. Now stress the property a further 20%:

Land and kilns 2.24 × 80% = 1.79

Net cash 1.79 + 0.45 + 0.48 − 0.27 = 2.45

Discounted: 2.452 ÷ 1.08^1.5 = 2.185

Downturn LGD = 1 − 2.185 ÷ 5.00 = 56.3%

Beside the bank, a second lender has an unsecured US$0.5m line to the same company. With the assets charged, it collects perhaps five cents in the dollar, an LGD of 95%. At a probability of default of 3%, the bank's expected loss is US$72,450 on US$5.0m and the second lender's is US$14,250 on US$0.5m: nearly twice the rate for the same failure. The haircuts and the dividend are the example's, not market norms.

// 04 — WHAT IT IS NOT

Loss given default is not loan-to-value, which compares the debt with a valuation before any of the deductions above. It is not the recovery waterfall, which is the order of claims; LGD is what that order leaves for one lender. Nor does it say whether default is likely: that is probability of default, and a lender that takes more security has reduced its loss, not the borrower's risk of failing.

DEFINED IN ONE PARAGRAPH → · EXPECTED LOSS, WORKED → · THE RECOVERY WATERFALL →

// 05 — WHERE IT DECIDES A FILE

It is the part of the credit equation a lender can change at the table. A borrower's grade is largely what it is, but a first-ranking mortgage, a guarantee, a lower advance rate or a deed of priority each move the loss. It also explains why perfection and ranking get so much attention at settlement: a security interest that is not perfected can leave a lender's loss looking like the unsecured line in the example.

And it decides what a valuation is for. A lender that accepts a going-concern figure for specialised plant has written a lower LGD than the file supports, and the difference appears only on the day the estimate is tested.

LIQUIDATION VALUE, WORKED → · WORKOUT: WHAT EACH PATH RECOVERS →

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Basel Committee on Banking Supervision, The Basel Framework, CRE32 and CRE36 — paragraphs 32.6, 32.7, 32.16 and 36.83 — The supervisory 40%, 45% and 75% figures, the LGD floors for corporate exposures, and the requirement that own estimates reflect downturn conditions and not fall below the long-run average — section 02.

// QUESTIONS PEOPLE ASK

How do you calculate loss given default?: Take the amount owed at default, estimate what will be recovered from security and other sources after costs and prior-ranking claims, discount those recoveries to the default date, and divide by the amount owed. Loss given default is one minus that fraction. On US$1m owed with US$650,000 in present-value recoveries, it is 35%. A simple version leaves out discounting, which understates the loss whenever recovery takes time, as it usually does for a mortgage or a business sale.
What is a typical loss given default for a secured loan?: There is no typical figure worth carrying from file to file, because the answer depends on the asset, the ranking, the jurisdiction and how long enforcement takes. The Basel framework's supervisory 40% for senior unsecured corporate claims and its floors are capital settings, not estimates of any particular loan. A bank's own data, split by collateral type and ranking, is the proper guide, and it is usually kept private.
Can loss given default be more than 100%?: Yes, in principle. If nothing is recovered and the lender has also paid receivers, lawyers and valuers, its total loss is larger than the amount owed at default, and discounting adds to the effect on a slow recovery. At the other end, a well-secured loan can come close to zero, which is one reason the capital rules set floors on a bank's own estimates.
Why is loss given default estimated for a downturn?: Because defaults and weak asset prices tend to arrive together. When many borrowers fail in the same recession, the property and plant securing their loans are being sold into the same weak market, so the average loss across good and bad years understates the loss in the years when most defaults occur. The capital rules therefore ask a bank using its own estimates to reflect downturn conditions where they matter.

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THE READING ROOMIN ONE PARAGRAPHLoss given default (LGD) What is loss given default?