Collateral Management Solution in the Banking Sector
Collateral management is something that is used in banking to help secure against the chances of somebody defaulting on a payment. It has been used for hundreds of years but has only been common and regularized since the 1980s.
The History of Collateral Management Solution
The first time that securities lending were used officially was in the 1980s by the Bankers Trust and the Salomon Brothers. They would take collateral to help protect them against their lenders potentially defaulting on any payments and losing out on the money. However, there are now standards legally on the collateral management solution and this did not happen until 1994.
Since then, technology has advanced and banking software is now widely available to help with determining the collateral based on the amount of loan required. There is also much more scrutiny over the solution and it has become something that is rather complex.
Lowering the Credit Risk
There are many people who are looking to borrow money, whether it is to buy a home, a car or even just to pay off the debts. When the amount gets to a certain amount, there is much more risk on the banks as there is no guarantee that the borrower will be able to pay back the money, this is when the securities lending comes in.
The collateral will be used to help reduce the risk and is something that has become extremely popular since 2008, when the economic crisis hit. It is also commonly used on those who have defaulted on loans in the past but need to borrow money to stay afloat.
The Types of Collateral
When it comes to using banking software, there are different types of collateral on offer. They each have their own risks and their own benefits but it is up to the bank as to the type of collateral management solution used.
Letters of credit and guarantors are used commonly for those who have very bad credit. This offers the chance for someone else to shoulder the debt if the original borrow is not able to pay off the debt. Of course, this form of securities lending has many risks to the guarantor since the debt will fall onto them and they will need to ensure they can pay it off – or make arrangements with the original borrower.
Real estate and equity are other common options for collateral. When someone wants to borrow a large amount of money, they will usually put their home up as equity or the home will automatically be used as security in the banking software when taking out a mortgage. The pros to this is, that the borrower does not usually have to put up any money beforehand but there are risks in losing the house if defaults are made.
Cash is another option and has been noted to be one of the most popular. Surprisingly, cash is used in 82% of times, claims the ISDA.
What Is Collateral Management?
A collateral management solution is the full process of granting the loan, verifying details and the collateral and then giving advice on the types of collaterals that will help to reduce the risk to credit. However, there are other functions to this management. Securities lending also makes it possible for a borrower to gain more money than one would without the collateral in place.