Collateral and Credit Risk Mitigation

Collateral and Credit Risk Mitigation

Belinda Green

30 years: Credit risk specialist

Lenders can minimise LGD, and mitigate credit risk by taking collateral. This video explores all the different aspects of collateral such as the purpose of collateral, the different types of assets taken as collateral and the key points a lender must consider when taking collateral.

Lenders can minimise LGD, and mitigate credit risk by taking collateral. This video explores all the different aspects of collateral such as the purpose of collateral, the different types of assets taken as collateral and the key points a lender must consider when taking collateral.

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Collateral and Credit Risk Mitigation

7 mins 18 secs

Overview

Lenders can minimise LGD, and mitigate credit risk by taking collateral. This video explores all the different aspects of collateral such as the purpose of collateral, the different types of assets taken as collateral and the key points a lender must consider when taking collateral.

Key learning objectives:

  • The different assets that are typically used as collateral

  • The main considerations relating to taking collateral

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Summary

What are the types of collateral?

Tangible fixed assets (like land, buildings, machinery etc) are most often pledged as collateral. However, it is also common to see current assets (cash, receivables, inventory etc) used as collateral and these are the most liquid forms of collateral available. Pledged assets typically are relatively easy to value, have a reasonably liquid secondary market and are generally legally permitted to be taken as collateral and according to lender’s policies.

What are the key considerations relating to taking collateral?

The 5 key considerations a lender must take into account are

  1. Identification and valuation of assets
  2. Documentation
  3. Perfection of security
  4. Control and monitoring
  5. Enforcement

Identification and valuation of assets - Lenders need to understand the legal environment and ensure that the lien will be valid, legally binding and enforceable.The due diligence process enables lenders to identify which assets are appropriate for the purpose of taking collateral. Regarding valuation, it is important to find out if these assets have a value outside of the business, as well as the ability to dispose of a pledged asset in a stressed scenario and also form a view on the liquidity of the asset. Valuation can either be based on book value, market value, or net realisable value. The most prudent valuation method is net realisable value.

Documentation and Perfection of security - The documentation involves the registration and notarisation of the collateral and this is very important for lenders to follow as per the governing law. To perfect their security and lenders need to check that the registration process has been accurately completed, otherwise the collateral might be void.

Control and Monitoring of security - Assets pledged as collateral must be monitored regularly to ensure continued visibility, existence. Lenders have to monitor the condition and support regular maintenance of the asset. Frequency of the monitoring process depends on the nature of the asset, the volatility of its valuation, the legal environment and internal policies of the lender.

Enforcement - Enforceability of collateral is often complicated and sometimes the lender might not have possession of the pledged asset. In a stress scenario, it is essential to locate the asset, ensure access and be able to identify and segregate the pledged assets. Enforceability is dependent on the governing law and jurisdiction. 

 

Now free to watch

This video is now available for free. It is also part of a premium, accredited video course. Speak to an expert today to watch more.

Belinda Green

Belinda Green

Belinda Green is a credit risk specialist, with a career spanning 4 continents and numerous sectors. She has spent over 20 years in commercial and corporate lending roles for FirstRand Bank and UBS, where she was director of Corporate Lending from 2002 until 2013. Belinda shifted into education in 2014 and was a Faculty Lead and Senior Trainer for Moody’s Analytics Learning Solutions in Dubai for over 5 years, leading and delivering training programmes across the Middle East and Africa. In 2019, Belinda launched her own training consultancy in London, delivering learning solutions to clients around the world.

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