Like collateral, guarantees on loans represent an additional source of mitigation against borrower credit risk in that, if the borrower defaults on the loan, the bank has additional recourse against the guarantor in order to recover all outstanding amounts owed. Adding a guarantee will have an impact on economic capital, and as a result, may impact the equity portion of the return (see How to Determine the Capital Calculation).
- Click the 'Guarantees' field
- Click the 'Add' button to select the type of guarantee.
- Select and/or enter values for the following fields as applicable
- Risk Rating
- Adding a risk rating to the guarantee allows the bank to assess the quality and credit risk of the guarantor being added to the loan separate from the borrower. A lower quality guarantee reduces the probability that the bank will be able to recover funds from the guarantee in the event the borrower defaults. Conversely, a higher quality guarantee improves the likelihood that the bank could recover funds in the event of borrower default. The Guarantor risk levels are the same as the loan’s credit risk levels but guarantor’s have unique factors applied to capital based on risk level.
- Exposure is the amount of principal at risk of loss in event of borrower default. The higher the Guarantor exposure %, the greater the likelihood that the bank could recover a portion of funds in the event of borrower default. The exposure % represents the percent of exposure guaranteed for the life of the loan by the guarantor.
- If a value is entered in the Amount field, then the % Of Commitment will automatically populate.
- The larger the amount is as a percentage of the commitment, the greater the likelihood that the bank could recover a portion of funds in the event of borrower default.
- % Of Commitment
- If a value is entered in the % Of Commitment field, then the Amount will automatically populate
- The larger the percentage of commitment, the greater the likelihood that the bank could recover a portion of funds in the event of borrower default.
- Risk Rating
- In the ‘Guarantees’ field, click the trash can icon next to the guarantee you want to delete