Currency of the collateral value

Currency of the collateral value

The question mark is the value of collateral,” he said.

The question mark is the value of collateral,” he said.

A CCP shall establish and implement policies and procedures to determine prudent haircuts to apply to collateral value.

Rising value of collateral (house prices) can increase wealth above the target level and raise consumption

The increase in collateral, due to the rise in the price of their house, means they can satisfy their desire to borrow more.

The increase in collateral, due to the rise in the price of their house, means they can satisfy their desire to borrow more.

For those who are credit-constrained: A rise in the price of your house can lead you to increase your consumption spending because the higher collateral enables you to borrow more.

A haircut is applied to provide some level of safety margin to accommodate possible fluctuations in the value of collateral between two margin calls.

borrowers’ abilities to service their loans, lenders ended up focusing on collateral values, in effect betting on rising housing prices (Gorton (2008) makes a similar point).

When the house price goes up—driven, for example, by beliefs that a further price rise will occur—this increases the value of the household’s collateral (see the left-hand diagram in Figure 17.18).

The mechanism through which a rise in the value of collateral leads to an increase in borrowing and spending by households and firms is called the financial accelerator (see Section 14.3 for these details).