Example Data Table
| Portfolio Type | EAD | PD | LGD | Model Type | Expected Loss |
|---|---|---|---|---|---|
| Secured Term Loan | 500,000 | 2.50% | 45.00% | PD LGD EAD | 5,625 |
| Unsecured Revolver | 220,000 | 4.20% | 70.00% | Expected Loss | 6,468 |
| Commercial Mortgage | 850,000 | 1.80% | 30.00% | Collateral Adjusted | 4,590 |
Formula Used
EAD = Funded Exposure + Undrawn Commitment × CCF + Accrued Interest + Fees Due
Expected Loss = PD × LGD × EAD
Collateral Adjusted LGD = (EAD − Present Value Recovery) ÷ EAD
Present Value Recovery = Net Recovery ÷ (1 + Discount Rate)Recovery Years
Downturn LGD = LGD × Downturn Multiplier
Lifetime PD = 1 − (1 − Annual PD)Term Years
Scenario Weighted Loss = EAD × Σ(Scenario Weight × Scenario PD × Scenario LGD)
Unexpected Loss = EAD × LGD × √(PD × (1 − PD))
How to Use This Calculator
Enter the funded exposure, undrawn commitment, and credit conversion factor.
Add PD and LGD as percentages, not decimals.
Enter collateral, haircut, recovery cost, and recovery timing.
Use downturn and scenario fields for stress testing.
Press calculate to view the result above the form.
Use CSV or PDF buttons to save the output.
Understanding PD LGD Loss Models
Credit loss models convert borrower risk into a money value. PD means probability of default. LGD means loss given default. EAD means exposure at default. Together, they describe how often loss may occur, how severe it may be, and how much balance is at risk. This calculator brings those parts into one workflow.
Why The Model Matters
Expected loss supports pricing, reserves, and portfolio monitoring. It is not the worst possible loss. It is an average estimate for a selected horizon. A loan with low PD can still create large loss when EAD is high. A loan with high PD can show moderate loss when collateral recovery is strong.
Model Choices
The basic model multiplies PD, LGD, and EAD. The collateral model adjusts LGD after haircut, recovery cost, and recovery delay. The downturn model increases LGD with a stress multiplier. The lifetime model converts annual PD into a multi year default probability. The scenario model blends base, adverse, and upside assumptions using weights.
Interpreting Outputs
Results should be reviewed with policy limits and portfolio context. A high collateral value does not always mean low risk. Haircuts, legal costs, market volatility, and recovery time can reduce value. Scenario weighted loss helps compare management views. Unexpected loss shows volatility around the expected value.
Good Inputs
Use current exposure, undrawn commitments, and a realistic credit conversion factor. Use observed default history where possible. Support LGD with recovery studies, collateral appraisals, and workout data. Keep scenario weights balanced and documented. Update assumptions when credit quality changes.
Practical Use
The calculator is useful for screening and education. It can support early credit review, pricing checks, and reserve discussions. It should not replace approved accounting, regulatory, or audit models. Financial institutions may need extra segmentation, macroeconomic overlays, validation, and governance. Always compare model output with judgment and documented evidence before decisions.
Governance Note
Store versions for each assumption set. Record sources, dates, owners, and approvals. Back test results against actual defaults and recoveries. Investigate large gaps. Sensitivity checks are also important. Change one input at a time and review movement in loss. Clear documentation makes the result easier to explain to finance, credit, and risk teams during regular model review cycles.
FAQs
What is PD?
PD means probability of default. It estimates the chance that a borrower will default during a selected period. It is usually entered as an annual percentage.
What is LGD?
LGD means loss given default. It measures the part of exposure not recovered after default. It may reflect collateral, costs, recovery delay, and market conditions.
What is EAD?
EAD means exposure at default. It includes current funded exposure and expected drawings from unused commitments. Accrued interest and fees may also be included.
How is expected loss calculated?
Expected loss equals PD multiplied by LGD multiplied by EAD. It represents an average estimated credit loss for the selected assumptions.
Why use collateral adjusted LGD?
Collateral adjusted LGD reflects recoveries from pledged assets. The calculator applies haircut, recovery cost, and discounting to estimate a more practical recovery value.
What does downturn LGD mean?
Downturn LGD increases normal LGD for stressed conditions. It can help test weaker collateral values, slower recoveries, or harsher economic assumptions.
What is scenario weighted loss?
Scenario weighted loss combines base, adverse, and upside assumptions. Each scenario uses its own weight, PD, and LGD to create one blended loss estimate.
Can this replace a bank model?
No. This tool is for education, screening, and internal estimates. Formal accounting or regulatory models need validation, governance, segmentation, and approved policies.