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Credit data accuracy? It’s all in your DNA

9 October 2018

Whether for internal credit risk management, upstream regulatory reporting or selling loans on secondary markets, making sure that your banking book collateral has high-quality DNA matters. A comprehensive bank-wide strategy is required for ensuring Collateral quality delivers benefits across the entire credit ecosystem.

Banking regulators have become ever more rigorous in their analysis of the assets that underpin bank lending. They are looking beyond the bank’s own reporting & calculations to get a deeper view of loan collateralization and security.

Proof of loan security and accurate asset valuations are critical success factors in 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 collateral’s journey through the credit process. The first strand represents the journey from initial modeling and offering of a loan, onto underwriting and, finally, to perfection. The second strand represents the on-going maintenance of collateral and its further use in deal re-financing 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 (re-)filing. 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 applying increasing scrutiny to the bank’s ability to demonstrate collateral values – from point-in-time valuations to on-going valuations and including a review of the entire process. They want evidence – an electronic paper trail – that filings are in place and that the correct procedures have been followed to secure them.

Regulators are also looking for evidence that adequate provisions are in place to protect against a 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 & linkages, and on the processes used to capture, maintain and manage data lineage.

Attention on Collateral DNA continues to tighten:

  1.  This year, the European Central Bank reviewed the IFRS 9 accounting provisions used to value distressed loans. They have mandated that banks now include an Asset Quality Review in assessing Loan Value for reporting as part of capital adequacy.
  2. Strategic decision makers in banks, whether risk- or business growth- focused, also need to understand Collateral DNA in order to understand the costs and risk profile associated with it.
  3. Loan books sold into secondary markets are being more heavily scrutinized for their collateral pedigree.

Whether for internal credit risk management, upstream regulatory reporting or the selling of loans on secondary markets – high-quality Collateral DNA matters. A comprehensive bank-wide strategy for understanding Collateral DNA delivers benefits across the entire credit ecosystem.

How well do you understand your Collateral DNA?

Click here to find out how Rockall’s collateral management approach can help to uncover the value in your collateral data.

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