Loss given default

The share of an exposure that is lost if the borrower defaults, after recoveries. It equals one minus the recovery rate.

Where you will meet it

Loss given default comes up in 67 learning outcome notes across the FRM syllabus. A few of them:

• Exchanges and OTC Markets
  FRM Part I · Financial markets and products

  “The expected loss is roughly: Expected loss = exposure × probability of default × loss given default.”

• The Building Blocks of Risk Management
  FRM Part I · Foundations of risk management

  “For credit, the formula is EL = PD × LGD × EAD.”

• Machine Learning and Prediction
  FRM Part I · Quantitative analysis

  “A linear regression forecasts a continuous quantity, such as next quarter's credit loss or a loss given default.”

• External and Internal Credit Ratings
  FRM Part I · Valuation and risk models

  “Loss given default is 1 − recovery rate.”

See also

Recovery rate

All terms beginning with L · FRM glossary

GARP does not endorse, promote, review, or warrant the accuracy of the products or services offered by Charta Learning, nor does it endorse any pass rates claimed by Charta Learning. Further, GARP is not responsible for any fees or costs paid by the user to Charta Learning. FRM® and GARP® are registered trademarks owned by the Global Association of Risk Professionals, Inc. The questions, explanations and study notes are written for this product and are not GARP curriculum material.