DAY 4 | LOSS GIVEN DEFAULT (LGD) IN CREDIT RISK | 100 DAYS OF ECL MASTERY SERIES #creditrisk

DAY 4 | LOSS GIVEN DEFAULT (LGD) IN CREDIT RISK | 100 DAYS OF ECL MASTERY SERIES Loss Given Default explained simply — but beyond the textbook definition. In this video, we break down LGD in credit risk, how banks calculate it, why it matters in Expected Credit Loss models, and how LGD differs under IFRS 9 and Basel regulatory capital frameworks. Most people explain LGD as: LGD = 1 − Recovery Rate But in real banking and credit risk modeling, LGD is much deeper. It depends on post-default recoveries, collateral value, legal recovery, workout costs, cure behavior, discounting, downturn conditions, and model validation. In this episode of the 100 Days of ECL Mastery Series, you will learn how LGD actually works inside banks, risk teams, model development teams, validation teams, and credit risk interview discussions. We will cover: • What LGD means in credit risk • LGD formula and practical calculation • Workout LGD and recovery cash flows • Why default is not the end of the credit risk process • IFRS 9 LGD vs Basel LGD • Downturn LGD and regulatory expectations • Why LGD differs across mortgages, personal loans, SME loans, and corporate exposures • Why LGD data is often bimodal or U-shaped • Why ordinary linear regression may fail for LGD modeling • Practical LGD modeling techniques including two-stage models, beta regression, fractional response models, survival analysis, and machine learning challengers • Key LGD model validation checks used in real credit risk teams • Interview-ready answers for LGD questions This video is designed for anyone preparing for roles in: • Credit Risk Modeling • IFRS 9 ECL Modeling • Basel Regulatory Capital • Risk Analytics • Model Validation • Banking Risk Management • Credit Risk Interviews • Financial Risk Management If you have already watched the previous videos in this series: Video 1: What is ECL, PD, LGD, EAD? Credit Risk Explained in 10 Minutes Video 2: Why Banks Use ECL Models | IFRS 9 & Basel III Requirements Video 3: PD Explained Simply | Probability of Default in Credit Risk Then this LGD deep dive will help you connect the second major ECL component after PD. Coming next: Video 5: EAD Explained Simply | Exposure at Default in Credit Risk ⏰ KEY TIMESTAMPS: 00:00 — LGD Modelling Introduction 02:33 — LGD Workout Process 03:07 — Workout LGD: The Practical Calculation 04:21 – Why LGD is Different across Loan Products 05:00 – IFRS 9 LGD vs Basel LGD 06:27 – Downturn LGD: Loss Severity Under Stress 07:21 – Basel LGD Floors and Interview Takeaway 08:22 – LGD Curve Details 10:02 – The Practical Modelling Mindset for LGD 11:57 – Two Core Regression Techniques for Bounded LGD 13:50 – Two Stage Cure Model 16:02 – Machine Learning in LGD 17:00 – Key Risk Drivers in LGD Models 17:58 – Collateral Haircut Framework for Secured LGD 19:08 – Data Quality Challenges 19:42 – LGD Model Validation 20:23 – LGD Interview Questions 24:51 – Key Takeaways from the LGD DeepDive 🔔 SUBSCRIBE ‪@riskmodellinghub‬we're building the most comprehensive free credit risk education on YouTube. Hit the bell icon so you never miss a video in this series! #creditrisk #lgd #lossgivendefault #riskmanagement #creditriskmodeling #ifrs9 #baseliii #eclmodel 💬 Drop your credit risk interview questions below — we answer every single one and use them to create future content. 👍 Like this video if it helped you understand PD modeling at a professional level. Your engagement helps other risk professionals find this content. 📊Questions for This Topic: 1. What is LGD in credit risk? 2. What does Loss Given Default mean? 3. How is LGD calculated? 4. What is LGD in banking? 5. What is the difference between LGD and recovery rate? 6. Why is LGD equal to one minus recovery rate? 7. What is workout LGD? 8. How do banks calculate LGD after default? 9. What is the difference between IFRS 9 LGD and Basel LGD? 10. What is downturn LGD? 11. Why does LGD differ across loan products? 12. What are the main drivers of LGD? 13. What is collateral haircut in LGD modeling? 14. Why are recoveries discounted in LGD calculation? 15. Why does linear regression fail for LGD modeling? 16. What is a two-stage LGD model? 17. What is beta regression in LGD modeling? 18. How is LGD model validation performed? 19. What are common LGD interview questions? --- 🚀 CHANNEL MISSION: Risk Modelling Hub is dedicated to helping finance professionals master credit risk, financial instruments, and banking expertise. We create in-depth, beginner-friendly content that explains complex financial concepts clearly. --- 📊 DISCLAIMERS & IMPORTANT NOTES: This educational content is for learning purposes. The techniques shown are industry-standard methods used in professional credit risk modeling. For actual production implementations, consult with your organization's risk management and compliance teams. --- © Risk Modelling Hub - All Rights Reserved Educational Content for Finance Professionals ---