Collateral Valuation

From Open Risk Manual


Collateral Valuation (also Collateral Appraisal) is the methodology used by a firm (in particular financial services firms such as banks) to measure the value of collateral linked to their lending activities.

Types of Valuation

Depending on the nature of the collateral the following valuation types might be available:

  • Full Appraisal
  • Drive-by
  • Automated Valuation Model
  • Indexed
  • Desktop
  • Managing or Estate Agent
  • Purchase Price
  • Hair Cut
  • Mark to market
  • Counterparties Valuation

Collateral And Real Estate Valuation

As part of a credit file review, it is necessary to ensure that physical asset valuations (e.g. real estate, aircraft, ships, artwork) used in the assessment of provisions or carrying values of on- balance sheet assets are appropriate. To do so, collateral values must be updated – either by having collateral revalued by a third party expert, or by updating a recent independent, external market valuation.

The following links describe the processes and methodology for collateral valuation for specific collateral types

Regulatory Requirements

Issues and Challenges

The areas for investigation are as follows:

  • Use of consensual vs. non-consensual foreclosure (historic and forward looking);
  • Collateral valuation processes by collateral type (CRE, RRE, shipping etc.) including:
    • Frequency of collateral revaluation (incl. indicator of number of loans overdue for appraisal)
    • Type of valuation (e.g. market value, long term economic value, replacement value, DCF etc.)
    • Bank adjustments to collateral valuations through use of index price movements
    • Priority of channel for disposal (e.g. Auction, direct sale, sale through third party etc.)
    • Expected and historical time to sale (from default to point of disposal)
  • Prudence of collateral valuation yield assumptions by region, primary/secondary, urban/rural and use

See Also