Loss Given Default

Loss given default and probability of default are credit risk standards. Once the probability of default of an investment has been calculated, it is critical to be able to calculate how much capital might be recovered if default occurs i.e. what the loss-severity or expected loss might be. This is what LGD models try to assess. The amount recovered as a result of default factors in a number of variables, such as the state of the general economy, the applicable laws of the relevant jurisdiction, the value of the defaulting business and of any collateral, and where the investor sits in the repayment hierarchy.