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Regulators have become more rigorous in their analysis of the assets that underpin bank lending. They are looking beyond the bank’s own reporting and calculations for a deeper view of loan collateralization and security. Proof of loan security and accurate asset valuations are critical to the capital reporting process. It is essential for every bank to have a clear and accurate view of banking book collateral that delivers an anatomical view of loan coverage – or collateral DNA mapping – to ensure a complete understanding of all aspects of the customer assets pledged to secure a loan.
We know that DNA comprises a double helix made up of two intertwined strands of nucleic acid molecules. Now imagine these two strands representing the journey of collateral through the credit process — the first strand from the initial modeling and offering of a loan to underwriting and finally perfection; the second strand the ongoing maintenance of collateral and its further use in deal refinancing or cross-collateralization before its final release back to the customer.
Both paths involve a number of important sub-processes requiring ongoing management, such as asset and collateral valuation, insurance management, flood management and UCC filings. These sub-processes are the “pairings” that complete the collateral DNA sequencing – and it is on these sub-processes that regulators are focusing.
For example, regulators are putting increasing scrutiny on the bank’s ability to demonstrate accurate collateral values – from point-in-time to ongoing valuations and including a review of the entire process. They want evidence – an electronic paper trail – that filings are in place and the correct procedures have been followed to secure them.
Regulators are also looking for evidence that adequate provisions are in place to protect against large-scale market disruption. They are looking for proof that the bank is using processes, protections and risk policies that will safeguard its longevity, and its ability to continue to operate in tough economic conditions.
Regulators no longer simply consider point-in-time reporting of data. They are focusing on the underlying data quality and linkages, and on the processes used to capture, maintain and manage data lineage.
The European Central Bank continues to review key reporting regulations like IFRS 9 relating to accounting provisions used to value distressed loans. They have mandated that banks include asset quality reviews in assessing loan value for reporting as part of capital adequacy.
Strategic decision-makers in banks, whether risk- or business growth-focused, increasingly need to understand their collateral DNA in order to understand the costs and risk profile associated with it. Loan books sold into secondary markets are likewise being more heavily scrutinized for their collateral pedigree.
Proven collateral quality delivers benefits across the entire credit ecosystem. But, it requires a comprehensive bank-wide strategy driven by expertise and innovation. Find out how Broadridge can help.