Turn A Collateral Haircut Into LGD

Estimate LGD for a $1.2 million exposure secured by equipment appraised at $1.5 million, with a 35 percent liquidation haircut and $90,000 recovery costs. LGD = loss after net recovery divided by exposure at default The trap is comparing appraisal value directly with loan balance. Appraisal value is not the same as forced-sale recovery after costs, timing, and enforceability. Step 1 Start with appraised collateral value: $1,500,000. This is the gross comfort number. It may assume orderly-market conditions and does not yet answer default severity. Step 2 Apply the 35 percent liquidation haircut: $1,500,000 x 65 percent = $975,000. The…

Sign up free — one personalized lesson every day, matched to your role and goals.

Already have an account? Sign in