Risk managing loan collateral at the Bank of England

Quarterly Bulletin 2014 Q2
Published on 16 June 2014

By Alice Alphandary of the Bank’s Risk Management Division.

The Bank stands ready to lend to its counterparties against eligible collateral, which includes a wide range of securities and portfolios of loans that can be adequately risk-managed through a combination of prudent eligibility criteria, valuations and haircuts. When accepting portfolios of loans as collateral, the Bank undertakes an extensive due diligence process to understand and mitigate the legal and financial risks associated with these loans and the level of uncertainty surrounding these risks. Residential mortgages now represent the majority of collateral pre-positioned and the Bank’s Risk Management Division uses loan-level data as an input to its credit stress and cash-flow models to calculate the stressed value of these loans in extreme, but plausible, scenarios.

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