Collateral: the most common type of credit risk mitigation technique.
It refers to the pledging or hypothecating by a borrower to a bank or lending institution.
Collateral is used as an item of value to obtain a loan and minimizes risks for lenders..
The corresponding credit value-at-risk (VaR), is the minimum loss of next year if the worst 0.03 percent event happens.
In another words, 99.97 percent of the time the loss will not be greater than VaR..
CCR is a reporting system where credit providers, such as Banks, are required to share customers' credit histories.
This helps financial institutions make more informed lending decisions.
Under Comprehensive Credit Reporting, credit providers share both positive and negative credit data..
Credit risk is the uncertainty faced by a lender.
Borrowers might not abide by the contractual terms and conditions.
Financial institutions face different types of credit risks—default risk, concentration risk, country risk, downgrade risk, and institutional risk..
VaR modeling determines the potential for loss in the entity being assessed and the probability that the defined loss will occur.
One measures VaR by assessing the amount of potential loss, the probability of occurrence for the amount of loss, and the time frame..
