Loss given default (LGD) · Concepts · European Finance Observatory

Roles that need it

Probability of default (PD)Probability of default is the likelihood that a borrower defaults over a given horizon, usually one year. Capital models use a long-run average (through-the-cycle) PD per rating grade, while IFRS 9 uses point-in-time 12-month and lifetime PDs that react to the economic outlook.
Exposure at default (EAD)Exposure at default is the amount a lender expects to be owed when a borrower defaults. For loans with undrawn limits, such as credit cards and revolving facilities, it adds the expected extra drawing through a credit conversion factor (CCF).
Expected credit loss (ECL)Expected credit loss is the probability-weighted estimate of credit losses over a period, the basis of IFRS 9 loss allowances. It is usually computed as PD x LGD x EAD, discounted at the effective interest rate, over 12 months for Stage 1 and over the lifetime for Stages 2 and 3.
Collateral valuationCollateral valuation sets the value of assets pledged to secure a loan, such as property, securities or cash, and keeps it up to date. EU rules require independent valuers for property and regular revaluation, and lenders apply haircuts for price falls and costs of sale.
IRB approach (internal ratings-based)The internal ratings-based approach lets a bank use its own approved models for probability of default and, in the advanced version, loss given default and exposure at default to set credit risk weights. CRR3 restricts its use for some portfolios and adds input floors.

Updated 31 Oct 2026.