Estimation of collateral value is an important part of the process of quantifying Credit Risk. Valuations having a greater level of accuracy and reliability translate to Loss Given Default (LGD) estimates that are more in line with what is expected to be recovered. Inaccurate valuations would mean that more capital than anticipated will be used up as recoveries from the liquidation of collateral are lower and slower than expected so that losses and costs of recovery are higher.
In the Collateral Valuation course we first define collateral and list the various types available. We consider the desirable characteristics that are sought for in collateral and a number of performance measures for evaluating its effectiveness. We review how collateral can help in enhancing the financial intermediation process and the impediments and restrictions that exist when there is insufficient collateral or when law pertaining to collateral is un-reformed or ineffective:
- Collateral Valuation: Credit Risk: Definition and Types
- Collateral Valuation: Credit Risk: Extent of collateral & Performance indicators for collateral
- Collateral Valuation: Credit Risk: Role of collateral in Financial Intermediation
- Collateral Valuation: Credit Risk: Collateral and Collateral Law
Next, we discuss the importance of collateral valuation to credit risk management. We consider some general principals of valuing collateral and then look at specific methodologies for valuing real estate, such as the sales comparison approach, income capitalization approach and cost approach. We also briefly review the estimation approaches used for other assets pledged as collateral:
- Collateral Valuation: Credit Risk: Importance of collateral valuation to credit risk management
- Collateral Valuation: Credit Risk: General principles
- Collateral Valuation: Credit Risk: Real Estate Valuation Approaches
- Collateral Valuation: Credit Risk: Sales Comparison Approach for real estate
- Collateral Valuation: Credit Risk: Income Capitalization Approach for real estate
- Collateral Valuation: Credit Risk: Cost Approach for real estate
- Collateral Valuation: Credit Risk: Approaches for other assets
After this we look into the process that is followed for ensuring that a lender is able to claim the collateral in the event of a default or breach of contract/ agreement. This process includes the creation, perfection and enforcement of security interest in collateral. We will also look at different elements of collateral management and how after full repayment security interest is terminated.
- Collateral Valuation: Credit Risk: Security Interest – creation and perfection
- Collateral Valuation: Credit Risk: Collateral Management of Security Interest
- Collateral Valuation: Credit Risk: Enforcement of Security Interest
- Collateral Valuation: Credit Risk: Termination or the extinguishing of Security Interest
If you would like to buy the complete course on collateral valuation, please see the Middle Office and VaR section at our online finance course store. The online finance course store includes easy-to-read-and-work-with downloadable pdf files, excel templates and ready-to-work with models that are shared to illustrate usage and speed up learning for advanced financial modeling, forecasting and simulation topics including interest rate forecasting and simulation, value at risk analysis, credit analysis and processes, Internal Capital Adequacy Assessment Process (ICAAP), asset liability management and other related middle office and risk topics.