Skip to main content
Custom print
Download Original PDF

7.4 Specific Requirements for Each Type of Collateral and Guarantees

No: 41033343 Date(g): 6/1/2020 | Date(h): 11/5/1441 Status: In-Force

Effective from Jul 01 2020 - Jun 30 2020
To view other versions open the versions tab on the right

A) Financial collateral

Under all approaches and methods, financial collateral should qualify as eligible collateral where all the following requirements are met: 
 
i.The credit quality of the borrower and the value of the collateral should not have a material positive correlation. Where the value of the collateral is reduced significantly, this should not alone imply a significant deterioration of the credit quality of the borrower. Where the credit quality of the borrower becomes critical, this should not alone imply a significant reduction in the value of the collateral.
 
 Securities issued by the borrower, or any related group entity, should not qualify as eligible collateral. Notwithstanding the aforementioned, a borrower's own issues of covered bonds qualify as eligible collateral, when they are posted as collateral for a repurchase transaction, provided that they comply with the condition set out in this paragraph.
 
ii.Banks should ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivatives and securities-financing counterparties, as measured by the timeliness and accuracy of their outgoing margin calls and response time to incoming margin calls.
 

B) Immovable property

i.Banks should clearly document the types of residential and commercial immovable property they accept in their lending policies.
 
ii.Immovable collateral should be classified in the following categories based on the underlying nature and behaviour:
 
 a)Investment properties;
 
 b)Owner-occupied properties;
 
 c)Development properties;
 
 d)Properties normally valued on the basis of trading potential.
 

C) Receivables

Receivables should qualify as eligible collateral, where all the following requirements are met: 
 
i.Banks should have in place a sound process for determining the credit risk associated with the receivables, such a process should include analyses of a borrower's business and industry and the types of customers with whom that borrower does business. Where the bank relies on its borrowers to ascertain the credit risk of the customers, the bank should review the borrowers' credit practices to ascertain their soundness and credibility;
 
ii.The difference between the amount of the loan and the value of the receivables should reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the bank's total loans beyond that controlled by the bank's general methodology.
 
iii.Banks should maintain a continuous monitoring process appropriate to the receivables. They should also review, on a regular basis, compliance with loan covenants, environmental restrictions, and other legal requirements;
 
iv.Receivables pledged by a borrower should be diversified and not be unduly correlated with that borrower. Where there is a material positive correlation, banks should take into account the attendant risks in the setting of margins for the collateral pool as a whole;
 
v.Banks should not use receivables from subsidiaries and affiliates of a borrower, including employees, as eligible credit protection:
 
vi.Banks should have in place a documented process for collecting receivable payments in distressed situations. Banks should have in place the requisite facilities for collection even when they normally rely on their borrowers for collections.
 

D) Other physical collateral

Physical collateral other than immovable property should qualify as eligible collateral, when the conditions specified as general requirements for collateral are met.

E) Treating lease exposures as collateralized

Banks should treat exposures arising from leasing transactions as collateralized by the type of property leased, where all the following conditions are met: 
 
i.The conditions set out for the type of asset/property leased to qualify as eligible collateral are met;
 
ii.The lessor has in place robust risk management with respect to the use to which the leased asset is put, its location, its age and the planned duration of its use, including appropriate monitoring of its value;
 
iii.Where this has not already been ascertained in calculating the Loss Given Default level, the difference between the value of the unamortized amount and the market value of the security is not so large as to overstate the credit risk mitigation attributed to the leased assets.
 

F) Other funded credit protection

Cash on deposit with, or cash assimilated instruments held by, a third-party institution should be eligible, where all the following conditions are met: 
 
i.The borrower's claim against the third party institution is openly pledged or assigned to the lending bank and such pledge or assignment is legally effective and enforceable and is unconditional and irrevocable;
 
ii.The third party institution is notified of the pledge or assignment;
 
iii.As a result of the notification, the third party institution is able to make payments solely to the lending bank, or to other parties only with the lending bank's prior consent.
 

G) Guarantees

Credit protection deriving from a guarantee should qualify as eligible unfunded credit protection where all the following conditions are met: 
 
i.The credit protection is direct and explicitly document the obligation assumed by the protection provider;
 
ii.The extent of the credit protection is clearly defined and incontrovertible;
 
iii.The credit protection contract does not contain any clause, the fulfillment of which is outside the direct control of the bank, that would:
 
 a)allow the protection provider to cancel the protection unilaterally;
 
 b)increase the effective cost of protection as a result of a deterioration in the credit quality of the protected loan;
 
 c)prevent the protection provider from being obliged to pay out in a timely manner in the event that the original borrower fails to make any payments due, or when the leasing contract has expired for the purposes of recognizing the guaranteed residual value;
 
 d)allow the maturity of the credit protection to be reduced by the protection provider.
 
iv.The credit protection contract is legally effective and enforceable, at the time of the conclusion of the credit agreement and thereafter i.e. over the life of the exposure;
 
v.The credit protection covers all types of payments the borrower is expected to make in respect of the claim. Where certain types of payment are excluded from the credit protection, the lending bank has to adjust, the value of credit protection to reflect the limited coverage;
 
vi.On the qualifying default of or non-payment by the borrower, the lending bank has the right to pursue, in a timely manner, the protection provider for any monies due under the claim in respect of which the protection is provided and the payment by the protection provider should not be subject to the lending bank first having to pursue the borrower.