Collateral Type is the classification of the variety of assets used as Collateral in various contexts of credit Provision and/or securitization. In practice any asset that can be legally owned and carries measurable value can be used as collateral.
In the banking system, the highest-level classification of collateral typically splits assets along Property / Non-Property. This is due to the (in general) lower valuation volatility and depreciation profile of Real Estate.
Asset Types Used as Collateral
- Financial Assets
- Commercial or residential real estate
- Other physical assets
- Liquid Collateral such as cash and accounts receivable
Implications for LGD
- The use and type of collateral has implications from Loss Given Default
Issues and Challenges
- The term collateral is widely used also in the context of Securitisation. Its meaning in that context is slightly different, for while the assets being securitised do indeed collateralize the notes being issued, these assets are actually the primary Credit Risk being underwritten / financed as opposed to being a Credit Risk Mitigation tool