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  • Collateral Valuation in Credit Risk Management TOC

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    Jawwad Farid
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    Collateral is an asset that is pledged by the borrower to the lender in order to protect the lender against the default of the borrower. It helps to align the interests of borrowers and lenders and is a part of the credit risk management process (specifically, its value is used in the estimation of loss given default (LGD)). Valuing collateral accurately ensures a more enhanced form of credit risk management. If collateral was not valued correctly a larger loan loss on default than expected could lead to a significant drain of the entity’s equity capital. The following topics will be addressed in this course: Definition and desirable characteristics of collateral Types of collateral Extent of collateral Performance statistics for collateral for evaluating its effectiveness Role of collateral in the financial intermediation process Impact of insufficient collateral Impact of un-reformed and ineffective collateral law Importance of collateral valuation to credit risk management General principles of collateral valuation Collateral valuation approaches for real estate property (including methodology, appropriate and inappropriate uses and sources of data and information) Sales comparison approach Income capitalization approach Cost approach Collateral valuation approaches for other assets (including farm product and inventory, mobile vehicle and intangibles) Security interest – the protection and enforcement of collateral Creation of security interest Perfection of security interest Collateral management (including credit risk management i.e. record keeping, reappraisal, and safeguarding enforceability i.e. safe custody and creation and management of the collateral book) Enforcement of security interest Termination of security interest http://fourquants.com/elearning/store-2/#ecwid:mode=product&product=8418805

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    Collateral is an asset that is pledged by the borrower to the lender in order to protect the lender against the default of the borrower. It helps to align the interests of borrowers and lenders and is a part of the credit risk management process (specifically, its value is used in the estimation of loss given default (LGD)). Valuing collateral accurately ensures a more enhanced form of credit risk management. If collateral was not valued correctly a larger loan loss on default than expected could lead to a significant drain of the entity’s equity capital. The following topics will be addressed in this course: Definition and desirable characteristics of collateral Types of collateral Extent of collateral Performance statistics for collateral for evaluating its effectiveness Role of collateral in the financial intermediation process Impact of insufficient collateral Impact of un-reformed and ineffective collateral law Importance of collateral valuation to credit risk management General principles of collateral valuation Collateral valuation approaches for real estate property (including methodology, appropriate and inappropriate uses and sources of data and information) Sales comparison approach Income capitalization approach Cost approach Collateral valuation approaches for other assets (including farm product and inventory, mobile vehicle and intangibles) Security interest – the protection and enforcement of collateral Creation of security interest Perfection of security interest Collateral management (including credit risk management i.e. record keeping, reappraisal, and safeguarding enforceability i.e. safe custody and creation and management of the collateral book) Enforcement of security interest Termination of security interest http://fourquants.com/elearning/store-2/#ecwid:mode=product&product=8418805

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    319 views3 pages

    Collateral Valuation in Credit Risk Management TOC

    Uploaded by

    Jawwad Farid
    Collateral is an asset that is pledged by the borrower to the lender in order to protect the lender against the default of the borrower. It helps to align the interests of borrowers and lenders and is a part of the credit risk management process (specifically, its value is used in the estimation of loss given default (LGD)). Valuing collateral accurately ensures a more enhanced form of credit risk management. If collateral was not valued correctly a larger loan loss on default than expected could lead to a significant drain of the entity’s equity capital. The following topics will be addressed in this course: Definition and desirable characteristics of collateral Types of collateral Extent of collateral Performance statistics for collateral for evaluating its effectiveness Role of collateral in the financial intermediation process Impact of insufficient collateral Impact of un-reformed and ineffective collateral law Importance of collateral valuation to credit risk management General principles of collateral valuation Collateral valuation approaches for real estate property (including methodology, appropriate and inappropriate uses and sources of data and information) Sales comparison approach Income capitalization approach Cost approach Collateral valuation approaches for other assets (including farm product and inventory, mobile vehicle and intangibles) Security interest – the protection and enforcement of collateral Creation of security interest Perfection of security interest Collateral management (including credit risk management i.e. record keeping, reappraisal, and safeguarding enforceability i.e. safe custody and creation and management of the collateral book) Enforcement of security interest Termination of security interest http://fourquants.com/elearning/store-2/#ecwid:mode=product&product=8418805

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    of 3

    COLLATERAL

    VALUATION IN
    CREDIT RISK MANAGEMENT

    By Jawwad Ahmed Farid

    C O L L A T E R A L V A L U A T I O N I N C R E D I T R I S K M A N A G E M E N T

    CONTENTS
    COLLATERAL VALUATION IN CREDIT RISK MANAGEMENT .................................................................................... 4
    1. COLLATERAL DEFINITION AND TYPES ..................................................................................................... 4
    i.
    ii.
    iii.
    2.

    Types of collateral ............................................................................................................................... 4


    Extent of collateral ............................................................................................................................ 5
    Performance indicators for collateral ............................................................................................... 5
    ROLE OF COLLATERAL IN FINANCIAL INTERMEDIATION ................................................................................. 6

    3. COLLATERAL AND COLLATERAL LAW ........................................................................................................ 7


    i. Impediments to financial intermediation and impacts on credit risk management .......................... 7
    4. IMPORTANCE OF COLLATERAL VALUATION TO CREDIT RISK MANAGEMENT ........................................................ 7
    5. COLLATERAL VALUATION - GENERAL PRINCIPLES ........................................................................................ 8
    6. COLLATERAL VALUATION APPROACHES FOR REAL ESTATE ............................................................................. 8
    i. Sales Comparison Approach ............................................................................................................... 9
    a. Methodology ......................................................................................................................... 9
    b. Appropriate Uses ................................................................................................................... 11
    c. Inappropriate Uses ................................................................................................................ 11
    ii. Income Capitalization Approach ........................................................................................................ 11
    a. Methodology ......................................................................................................................... 11
    b. Appropriate Uses ................................................................................................................... 12
    c. Inappropriate Uses ................................................................................................................ 12
    d. Sources of Data/ Information ................................................................................................ 12
    iii. Cost Approach .................................................................................................................................. 12
    a. Methodology ......................................................................................................................... 12
    b. Appropriate Uses ................................................................................................................... 13
    c. Inappropriate Uses ................................................................................................................ 13
    d. Sources of Data/ Information ................................................................................................ 14
    7. COLLATERAL VALUATION APPROACHES FOR OTHER ASSETS ........................................................................... 14
    i.
    ii.
    iii.
    8.

    Farm Product and Inventory ............................................................................................................... 14


    Mobile Vehicle ................................................................................................................................... 14
    Intangibles ........................................................................................................................................ 15
    SECURITY INTEREST THE PROTECTION AND ENFORCEMENT OF COLLATERAL .................................................... 15

    i. Creation of security interest ............................................................................................................... 15


    ii. Perfection of Security Interest ........................................................................................................... 16
    iii. Collateral Management .................................................................................................................... 16
    a. Credit Risk Management ....................................................................................................... 16
    b. Safeguarding Enforceability .................................................................................................. 17
    iv. Enforcement of Security Interest ..................................................................................................... 18
    v. Termination or the extinguishing of Security Interest ....................................................................... 18
    BIBLIOGRAPHY/ REFERENCES ........................................................................................................................ 20
    DISCLAIMER .............................................................................................................................................. 21


    Please do not photocopy or distribute without permission. All rights reserved Alchemy Software Pvt Limited.
    http://FourQuants.com
    Page 3 of 21

    C O L L A T E R A L V A L U A T I O N I N C R E D I T R I S K M A N A G E M E N T

    B IBLIOGRAPHY / R EFERENCES
    v Collateral, Collateral Law and Collateral Substitutes, 2nd Edition, Working Paper No. 26, Social
    Finance Programme, B. Balkenhol, H. Schutte
    v Understanding real estate values in a rising market, Gerald A. Bower, Feb 21, 2001
    v Basics of Creation and Perfection of Security Interests Under Article 9 of the Uniform Commercial
    Code, presented by Robert K. Weiler to the Onondaga County Bar Association (September 2006)
    v Real Estate Appraisal (http://thismatter.com/money/real-estate/real-estate-appraisal.htm)
    v Interagency Appraisal and Evaluation Guidelines, October 27, 1994
    v Land Administration Guidelines, Economic Commission for Europe, United Nations 1996
    v The Income Capitalization Approach (http://www.propex.com/C_g_inc.htm)
    v The Cost Approach( http://www.propex.com/C_g_cost.htm)
    v Valuation Standards: Are we doing it right?, Chris Thorne, IVSC, 2007


    Please do not photocopy or distribute without permission. All rights reserved Alchemy Software Pvt Limited.
    http://FourQuants.com
    Page 20 of 21

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