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