Collateral Valuation

From Open Risk Manual

Definition

Collateral Valuation 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.

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

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

References

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