Collateral (finance)

Credit protection ( also collateral ) serves to hedge a credit risk by things or by the creditworthiness of other companies or persons. Through collateral the creditor intends a claim that it is safe for insolvency in the event that the debtor can not pay back with interest. The opposite form unsecured loans.

  • 8.1 Symmetric Information
  • 8.2 Asymmetric Information 8.2.1 sorting effect: signal for high credit
  • 8.2.2 Incentive effect: no damage to the creditor

General

Credit protection is in wide circles of the economy in general an instrument of risk minimization. Wherever a creditor does not want to carry a risk of claim, he has the ability to hedge it. This can be done by retention of title or delcredere (suppliers, vendors), export credit insurance (exporters, importers ), loan collateral in the narrower sense ( bank loans in the banking sector ) or re-insurance in insurance. It is the function of the collateral, which reduce as far as possible the lending business own moment of uncertainty.

Legal Aspects

A collateral is regularly required in those cases in which the creditor does not want to leave unsecured its demand for risk reasons. The law provides for this reason, some transactions from the outset as collateral, that finally the retention of title ( § 449 para 1 BGB), the guarantee ( § 765 para 1 BGB), the mortgage ( § 1113 BGB) and the lien ( § 1204 BGB). In these transactions, the law requires the existence of a claim ( or liability from the perspective of the guarantor or obligor ) for this statutory collateral ever be legally effective or can stay. Moreover, it has developed through contracts still a variety of loan collateral.

Credit protection are thus especially from a legal perspective:

  • Liens on rights ( eg receivables or company shares ), on movable property ( pledge ) and land ( mortgage, property and annuities, real load);
  • Assignment of claims ( assignment as security );
  • Assumption of debt, joint and several liability and several liability;
  • Warranty;
  • Transfer of ownership, transfer of ownership of motor vehicles.

It is characteristic of the credit protection that the creditor for the purpose of securing his claim against the debtor have other rights granted by contract. These additional rights may either be directed against the debtor himself or part of its assets or the creditor protection can be that the creditor can take for the purpose of satisfaction of his claim against the debtor third party claim.

Collateral may be required by different types of creditors; most common collateral in lending under the credit agreement will be agreed by banks. The Institute then make their lending no longer alone on the repayment claims against the borrower from, but justify thereof largely independent claims on such realization proceeds from loan collateral.

Because of the functional equivalence of the various legal institutions of credit securing an overall consideration is beneficial.

Distinctions

Collateral can be distinguished by the use in personal and property security. Another distinction allows the legal character; made between the accessory and not the accessory (so-called abstract ), a distinction collateral. In addition, can be differentiated according to whether the law the collateral as such provides ( original collateral) or whether the securities were first developed by the Kautelarpraxis (derivative securities ).

  • People are the collateral guarantee ( § 765 BGB), the warranty, the assumption of debt ( § 421 BGB) and the comfort letter.
  • The non-cash collateral include the assignment in accordance with § 398 BGB, the collateral assignment (§ § 929, § 930 BGB), the lien (§ § 1204 et seq and § § 1273 et seq ), the mortgage (§ § 1113 et seq ) and the mortgage (§ § 1191 et seq ).
  • Primary collateral of this guarantee, mortgage and liens. Derivative are correspondingly guarantee ( assurance ) mortgage, ( backup ) of assignment and transfer of ownership.

If collateral provided several creditors are available simultaneously, it is called a collateral pool (see also collateral trust agreement ).

Customary bank loan collateral

The banks do not impose legal obligations for accepting collateral in Germany. Neither the KWG not yet determine the solvency or the minimum requirements for the credit business, when concrete collateral are beginning to increase, and when. However, the collateral may be 154 Solvency risk-reducing impact on the default risk of the borrower and are therefore deducted from the own funds in credit load, what the cost of equity for loans granted and thus reduces the cost of credit to the borrower. According to § Collateral and are not part of the rating; However, the security request can be the result of the rating. Collateral may only be considered when determining the actual expected loss. Therefore, credit institutions may, within their credit scoring autonomously decide whether and what collateral they take in. They focus on " customary banking collateral ". The law did not mention vague legal term " customary banking collateral " applies to various types of security that have the following in common:

  • Low volatility:
  • Fast Liquidisierbarkeit:
  • No correlation with the economic situation of the borrower:
  • Insolvency strength

These criteria are generally fulfilled by the following collateral:

Register charges

As a rule, mortgages to secure long-term loans are used ( credit period > 4 years) in real estate. Mortgages, however, play in the banking practice, not a big role, as they can not be used to secure additional loans as accessory collateral. In connection with the financing of ships, the ship mortgage, is used for aircraft since its introduction in 2009, the aircraft mortgage.

Guarantees

Guarantees are a number of situations normal security to prevent transfers of assets to the detriment of the creditor:

  • Guarantee from the shareholder / manager for its borrowing GmbH ( shareholder guarantee),
  • Guarantee of the spouse for the debts of the other spouse (spouses guarantee)

Further occur pledges from family members, if the creditworthiness of the borrowers is not sufficient.

In corporate banking guarantees, indemnities and letters of comfort play an important role between associated companies.

Cessions (assignment )

In the consumer market, a wage assignment is usually incorporated in the loan agreements. Frequently claims from insurance payments be assigned:

  • Endowment life insurance to pay off the loan
  • Term life insurance to cover the risk of death
  • Fire insurance in the financing of real estate
  • Insurance in the financing of motor vehicles

In order to secure a loan is often agreed payment protection insurance ( and assigned ) covering the risk of death, disease and possibly unemployment.

In the financing of freelancers, self-employed and businesses an assignment is often agreed. Thus occurs, for example, a doctor his claims against Ambulatory Health Association to the bank as security for financing from its practice.

In corporate banking, the coat or blanket assignment of receivables for goods and services is used as a means of credit insurance.

Pledges and collateral loan

One differentiates the pledge of rights and movable property. Usual is a pledge of securities portfolios (eg as part of an effect Lombard loan ). Securities in the narrow sense as pledged things, so by agreement and transfer. Pledges of property play in bank loans (except precious metal) does not matter, but rather are preferred in the pawnshop. The debtor remains the owner, the lender is the owner of the pledge ( pawn principle).

Transfer of ownership

The disadvantages of physical transfer, as in the case of pledge of movable assets, are avoided in the transfer of ownership. The transfer of ownership on the collateral will indeed take place legally, the transfer shall be replaced in accordance with § 930 BGB by a bailment ( constructive possession ). Since the creditor thereby the borrower loan leaves the suitable thing about the immediate possession, the Bank is exposed to a greater risk of loss than about safety in the pledge.

In the field of car finance a transfer of ownership of motor vehicles is possible. The registration certificate II (formerly Automotive letter, see vehicle letter ) is passing in the bank.

In corporate sector are chattel of inventories and machinery usual ( eg in the form of a space security treaty ).

Other collateral

Other customary banking collateral in the corporate sector, the negative declaration, the comfort letter or the various forms of joint liability outside of the guarantee (such as warranty, assumption of debt, cumulative assumption of debt or joint and several liability ).

Safety assessment

The common criteria of " standard collateral " are equally met by all enumerated types of collateral. Therefore, a safety assessment has to be made in the process and the fulfillment of the criteria is investigated as a " usual bank security." The difference in valuation will then go to the mortgage lending value and the lending limit to the expression ( see also over-collateralisation ). The credit institutions must be organized according to § 25a German Banking Act so that a realization of the estimated values ​​are actually succeed.

Security amplification

Banks reserve in the loan agreements and / or its Terms ago, a security enhancement, that is, to request the provision of additional collateral in both, if the collateral depreciate in value or the financial condition of customers deteriorates. This individual contract is supported by § 490 para 1 BGB. To this end assurances are agreed (covenants) in the loan agreements. Part of the general covenants such as the " significant deterioration in the economic conditions ," which lists 1 BGB individual examples on the basis of § 490 paragraph when such deterioration is deemed to have occurred. In the context of financial covenants agreed in the corporate balance sheet Relations clauses, for example, intended to ensure the observance of certain balance sheet ratios ( capital adequacy ratio, leverage or cash flow) within a certain range (so-called "headroom "). Deviations from these covenants require the borrower to position additional collateral or even solve on creditor side an extraordinary right of termination.

Legal risks associated with collateral

From the very detailed provisions of the Solvency Regulation, for qualifying collateral can be closed, what requirements must be met by the legal certainty generally in agreement of loan collateral. From § 170 Paragraph 1 No. 1 of the Solvency Regulation ( life insurance ) indicates that all analog security contracts at the time the contract is concluded in all relevant jurisdictions legally effective and shall be enforceable. Furthermore, analogous to § 154 sentence 2 of the Solvency Regulation must make all banks a sufficient review of the legal enforceability of their contracts for all relevant jurisdictions, even with changes in legislation or changes in case law. Legal certainty can therefore be formally understood as the absence of legal risks.

Economic justification for collateral

There are economic reasons for loan collateral. There will now be a distinction between symmetric and asymmetric distributed information between borrowers and lenders.

Symmetric information

These will be considered as a benchmark symmetric information. A risk-neutral entrepreneur takes to finance a project on a loan. With a certain probability it comes to repay the loan amount including interest. In a bankruptcy gives the company can still be found in a particular asset. Substituting a particular capital market rate for secure investments ahead, so can the interest charge, which the investor needs to ask in order to get the same return in the expected value.

Secured and unsecured loans obtain the expected value of the safe capital market interest

A security with a liquidation value of the security amount compounded at the risk- free interest rate is paid back with 100 percent probability. The rest of the proceeds will remain in liquidation amount. Also with a security equivalent to the expected return of the loan commitment to the safe capital market rate. This applies to the entire continuum between fully secured and unsecured. Collateral offer in this world of symmetric information thus no advantage.

It follows that credit protection is irrelevant in a world of symmetric information.

Asymmetric information

With asymmetric information, collateral lead to a mitigation of the negative effects of quality and behavioral uncertainty. Collateral can be used as a tool to determine the quality of the borrower.

Sorting effect: signal for high credit

Investor has contracts with interest rate guarantees combinations of

At higher collateral of the loan rate offered is lower. Borrowers that offer high security, thus send out a signal of good quality. Securities are suitable under certain circumstances to discourage borrowers from an increase in risk. For this purpose, the assets, the collateral, the liquidation costs and the expected profit and loan amount to be modeled.

Good borrowers choose contracts with low interest rates and high collateral

In this way a distinction between the types of borrowers by the lenders is possible.

Incentive effect: no damage to the creditor

Increase security the repayment amount R is selected from the more risky a project

With the determination of the critical Redemption Amount succeeds the lender to influence the project choice of the borrower.

Influencing the choice of projects with a rate hike discretion without adverses selection behavior

As a result, even a liquidation value of zero would be worthwhile for the provision of collateral. In this way, namely, the right incentive effects are achieved.

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