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Credit loss allowances are expected to increase as impairment standards like IFRS 9 and FASB evolve. It’s more important than ever to optimise LLP. Banks that can demonstrate robust loan collateralisation are much better positioned than those who cannot.
Choosing the right banking book collateral management solution can make all the difference.
The best solutions standardise complex data to deliver a consolidated view of the loan book. Consolidated data helps bring together the wide-ranging data sets needed to achieve LLP reliability and efficiency.
Collateral reduces credit risk in several areas, including regulatory reporting, capital cost and default exposure. It’s crucial that banks capture, record, track and maintain collateral and/or guarantees that support all loans.
Consider a collateralised loan and a non-collateralised loan that are otherwise identical: The credit risk associated with the collateralised liability is less than the credit risk of the non-collateralised liability. In some cases, the credit risk for a collateralised liability may even be close to zero. In either case, however, the bank must prepare for potential credit loss.
Under IFRS 9’s Expected Credit Loss (ECL) Framework, banks have two options for measuring ECL over the life of the loan.
Option #1: When a bank can track and manage collateral valuations at an individual loan level, they can apply the ECL Framework on each and every loan based on several factors:
Option #2: In the event a bank does not regularly track collateral valuations, IFRS 9 indicates that they can still track the sale value of the collateral. This approach enables banks to track collateral valuations and assign a group ECL against loans using similar collateral types.
Both scenarios require banks to record and trace collateral data in order to substantiate assigned ECLs. Tracing collateral data is complex. Banks must show either the collateral data feeding into an LTV or that a group rating based on collateral type is being applied. In addition, banks need to track and manage full address information for the borrower and the collateral. Precise tracking is critical in the event that collateral values deteriorate—whether in certain geographical areas or across demographics.
There’s a clear incentive to holistically track and manage banking book collateral data. Not only does active collateral management help banks meet demanding regulatory reporting requirements, it also delivers significant savings by supporting efficient loan loss provisioning models.
Let Broadridge help. COLLATE makes it easy to aggregate and standardise collateral data, empowering banks to clearly demonstrate collateral coverage and current valuations. Through a consolidated view of banking book collateral, you can drive efficient and reliable LLP and regulatory reporting.
For more, contact your Broadridge Account Representative today, or visit broadridge.com/COLLATE
Luke Nestor has been in the Financial Services technology business for over thirty years. An expert in credit and loan systems, Luke founded Rockall to create banking book collateral management products that deliver value both operationally and strategically. Over his career, Luke has designed and built retail banking systems across multiple divisions.