A measure of loss given default (LGD) that captures the worst level reached in the economic cycle (the trough). Downturn loss given default (DLGD) represents the LGD at the worst time of the economic cycle, and hence it is used as an input in calculating a bank’s economic capital (EC), which, by design, is meant to cover possible losses incurred over and above expected levels.

This measure of LGD is about making estimation in portfolios (credit exposures) in which the loss given default is significantly sensitive to the economic cycle, as it involves recovery processes that cover extended periods of time in which the isolated effects of the economic cycle are meant to be mitigated. Otherwise, if connection or correlation with the economic cycle is not established, DLGD is not a proper measure for loss given default.