Personal Collateral

Private securities

Confidence, relationship loans, SMEs, personal securities. Private securities Austria's regulatory authority, the Financial Market Authority (FMA), has transposed the EU Directive 2006/48/EC on Banks and Financial Intermediaries and enacted the Ordinance on the Solvency of Banks (on reducing lending risks, see Annex VIII to this Directive). Solvency Ordinance (SolvaV) contains detail regulations for the calculation of the risks associated with the exposures of banks.

Besides collateral (including collateral ) and Netting, a bank may also take personal collateral to reduce the exposure to counterparty risks. Guaranties and loan derivates are creditable personal securities. Derivative instruments used for mitigating exposure to the following types of exposure may be used: i) Credential defaults ( "credit defaults "), ii) totals returns ("total returns "), and iii) credits borrowed as far as they are financed in hand (Art. 98 SolvaV).

Essentially, financial intermediaries may use personal collateral from the following sources: government and CBs, government regions and municipalities, certain MDBs (such as IFC or EBRD) and IRBs, certain government agencies, financial intermediaries and other firms to which an ECAI rated 2 or higher (and, in certain cases, where the ECAI's internally rated approaches give the firm the impression that it had an ECAI rated 2 or higher).

Back guaranties from federal or provincial government, multi-lateral aid agencies or other government agencies are also permitted as personal collateral (as an exception to the basic rule of lending protection). The hedged amount is subject to the benefit of mitigating exposure, which is the collateral provider's covenant.

The value of collateral on loan derivative instruments is lowered if the reorganisation is not considered a loan occurrence. In the case where the bank applies the standard method for solvency exposures, the main obligor's exposures shall be replaced by the exposure weight vis-à-vis the guarantor.

In the case where the bank applies the rating method, the risk-weighted exposures (or, where appropriate, a PD between the guarantor and the borrower's PD) are calculated using the guarantor's PD. Any personal collateral (guarantees and loan derivatives) must meet the following requirements:

You must offer immediate loan cover. Amount and scope of loan collateral must be clearly specified. Loan cover must be valid and enforcable (legal opinion). No clause may exist the performance of which is outside the creditor's immediate sphere of influence and which would enable the guarantor one-sidedly to terminate the cover or to raise the actual costs of protecting the loan as a consequence of a deterioration in the rating of the covered commitment or to reduce the term of the cover.

The personal collateral must be sufficient to meet all kinds of payments. The following supplementary conditions must be met by derivatives: Loan incidents are default, bankruptcy or illiquidity of the debtor or reorganisation (if the reorganisation is ruled out, the amount of reduction in risks is reduced). Clearly define who is accountable for identifying the loan occurrence; this should not be the exclusive responsibility of the collateral giver.

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