In banking, the lending limit (also the lending rate ) is a certain percentage of the lending value of loan collateral , up to which credit institutions may grant a maximum credit . As a rule, it is not the lending value that limits the loan amount, but the lower lending limit.
Collateral serve in non-performing loans in liquidation event to provide a realization proceeds, sufficient to open credit exposure of the bank to cover. For this reason, when a loan security is accepted, its value must be determined as part of the security assessment. This value is called the mortgage lending value and, according to the legal definition of Art. 4 Para. 1 No. 74 Capital Adequacy Ordinance (CRR), is the value of a property “that is based on a careful assessment of its future marketability, taking into account its long-term, permanent properties, normal and local Market conditions, the current use and appropriate alternative uses is determined. ”It is a value determined internally on the basis of available, objective information, which can be achieved when the property is sold without time pressure and is sufficient to cover a non-performing loan. The CRR deal intensively with real estate financing secured by mortgage , but the basic statements about this can also be applied analogously to other loan collateral. The determination of the mortgage lending value only serves to determine whether the proceeds of a certain loan security - which are still uncertain at the time of acceptance - are sufficient to cover the outstanding loan claims in the event of realization.
Determination of the lending limit
The mortgage lending value based on the market value does not yet take into account individual risk of fluctuations in value and liquidation risks of a certain loan security, nor does it take into account its more or less rapid liquidation . These value risks include general economic value fluctuation risks, individual value fluctuation risks in market prices and exchange rates , creditworthiness fluctuations in issuers of securities and other third debtors and the market liquidity . These value risks are to be countered appropriately with the lending limit. A percentage deduction is therefore made from the mortgage lending value to take account of these value risks. This means that the lending limit has a fixed relationship to the lending value and indicates the highest possible part of the lending value that the loan can utilize. Lending value and lending limit aim to determine the loan amount taking into account the risk factors according to the value of the object to be lent. The loan-to-value limit is intended to show the proceeds which, with a high degree of probability, will not be undershot when the loan security is realized .
The higher the value risks, the lower the lending limit and vice versa. Be about Bunds mortgaged, so there is no foreseeable value risk, because a credit risk of the borrower Federal Republic of Germany is the best rating grade almost impossible, while an interest-related price risk by collecting only at maturity of the bond can be met. The result is a lending limit of 100% of the lending value. On the other hand, volatile stocks on a narrow market in foreign currencies with a poor rating , for example, exhibit the highest value risks, since in addition to the high exchange rate risk there is also an - independent - currency risk (see risk class ). There is also an issuer risk. For these reasons, it is possible that your loan-to-value limit is 0% and that you are therefore not eligible for loan security.
Banking supervisory regulations
The Capital Adequacy Ordinance (CRR), which has been in force since January 2014, recognizes loan collateral in the context of so-called credit risk mitigation techniques . The CRR generally distinguishes between two procedures, namely the credit risk standardized approach (CRSA) and the IRB approach (with two sub-forms). In addition to a much larger group of eligible financial securities and recognized guarantors, both personal and physical security are recognized to reduce risk.
In order to be able to take credit risk mitigation techniques into account when calculating capital requirements , institutions must comply with certain minimum qualitative requirements. According to Art. 4 Para. 1 No. 58 CRR, property collateral or real collateral is part of the "collateralisation with security deposit", in which the credit risk associated with bank loans is reduced by the fact that the institution has the right to counter default of the borrower or in the event of certain other credit events "To realize certain assets or amounts, to obtain their transfer or their provision or to withhold them, or to reduce the exposure amount to the difference between this and the amount of a claim against the institution or to replace this with this difference".
Art. 192 ff. CRR contain further provisions on the requirements for credit collateral that can be recognized and their risk-reducing effect. According to Art. 194 No. 1 CRR, the collateral must be legally effective and enforceable in all relevant jurisdictions; According to Art. 194 No. 2 CRR, banks must take all necessary measures to ensure the effectiveness of the collateral and to address the associated risks. According to Art. 194 No. 3b CRR, the collateral must be sufficiently liquid and its value must remain sufficiently stable over time; Timely recovery or retention must be guaranteed (Art. 194 No. 4 CRR). The positive correlation between the collateral and the borrower's creditworthiness must not be very high (Art. 194 No. 4 CRR). This applies, for example, to the granting of a loan to a stock corporation , which is to be secured by pledging its shares . In this context, positive correlation means that the deterioration in the company's creditworthiness is generally accompanied by a decline in the price of the pledged shares.
The standardized approach according to Art. 197 No. 1a recognizes cash deposits at the lending institution, government bonds or bonds from central banks with a minimum credit rating of 4 (Art. 197 No. 1b CRR), other bonds with a minimum credit rating of 3 (Art. 197 No. 1c -e CRR), shares or convertible bonds in the main index (Art. 197 No. 1f CRR), gold (Art. 197 No. 1g CRR) and securitisations with a minimum credit rating of 3 (Art. 197 No. 1h CRR). A lending limit for the individual types is not specified by law. According to Art. 193 (4) CRR, “ cash , securities or goods that are acquired, borrowed or delivered in the context of a repurchase agreement , securities or commodity lending transaction” also count as collateral. The collateral provider's assets can be pledged (§ § 1204 ff. BGB) of bank balances with third institutions or securities, the assignment of security (§ § 398 ff. BGB) of claims and other rights , the transfer of ownership of movable property in general and the assignment by way of security of motor vehicles (§ § 929 , § 930 BGB) are taken into account. According to Art. 229 (1) CRR, the market value for this loan collateral is then the lending value, in the case of claims its nominal value .
Banks calculated according to Art 223 Abs 2 CRR to be taken into account.. Volatility adjusted value of the security as follows:
This corresponds to
- the lending value of the security,
- the collateral-appropriate volatility adjustment calculated in accordance with Articles 224, 227 CRR (lending limit or "haircut"),
- the volatility adjustment calculated in accordance with Articles 224, 227 CRR and commensurate with the currency mismatch (if credit and collateral are denominated in different currencies ).
If, for example, the default loan amount (EaD) is 800,000 euros, the lending value (market value) of the collateral is 900,000 euros, the standard haircut is 25% (lending limit for shares in the secondary index) and there is no currency mismatch ( ), the loan amount is to be backed with own funds after credit risk reduction EUR 125,000 ( risk position value ):
Ausfallkredithöhe (EaD): 800.000 Euro Beleihungswert verpfändete Aktien: 900.000 Euro − Beleihungsgrenze (Haircut) 25 %: 675.000 Euro Kredithöhe nach Kreditrisikominderung: 125.000 Euro
Lending limits for real estate
Under certain prerequisites under banking supervisory law, residential properties that are used or rented by the owner themselves are permitted with a lending limit of 80% of the lending or market value (Art. 125 No. 2d CRR) and, in the case of commercial properties, 60% of the lending value or 50% of the market value (Art. 126 No. 2d CRR). However, this higher lending limit does not apply to real-estate loans in Germany . According to Section 14 PfandBG , the lending limit for real estate loans in Germany is 60% of the lending value; this is the only legally stipulated lending limit. That is why mortgage banks , Pfandbrief banks , savings banks , cooperative banks and commercial banks are allowed to finance a maximum of 60% of the mortgage lending value of residential real estate as part of the real estate loan. With impeccable credit standing may in some cases borrowers and loans are granted, which go beyond these lending limit and amount to 80% of the loan value. The amount exceeding 60% applies in the standardized approach to credit risk as a blank loan , which is based solely on the creditworthiness of the borrower. This is a so-called " real loan splitting ", which is still possible. The lending limit exceeding personal loan part than in the corresponding asset class unsecured credit to be considered.
|Art||Lending limit in%||Value convention|
|Real estate loan (residential real estate)||Max. 80%||Lending or market value|
|Real Estate Loan (Residential Real Estate)||Max. 60%||Mortgage lending value|
|Real Estate Loan (Commercial Real Estate)||Max. 60%||Mortgage lending value|
|Real Estate Loan (Commercial Real Estate)||Max. 50%||Market value|
Lending Limits for Securities
While the lending limits for real estate are largely constant for all groups of institutes, there are - in the absence of legal requirements - significant differences in the lending limits for securities . Lending limits for securities play a role in particular in the case of securities lombard loans . The lending limits are disclosed there in the loan agreement so that the borrower can determine the maximum credit limit himself. Possible values are:
|Art||Lending limit in%||Value convention|
|Equities, standard values from the euro area||40% to 70%||Market value|
|Shares, default values in foreign currencies||30% to 50%||Market value|
|Stocks, small caps||30% to 50%||Market value|
|Stocks, speculative values||0%||Market value|
|German government bonds||100%||Face value|
|Savings (cash) letters and bonds||100%||Face value|
|foreign government bonds, minimum credit rating 4||0% to 80%, depending on rating||Market value|
|other foreign bonds, minimum credit rating 3||0% to 70%, depending on rating||Market value|
Lending limits for other collateral
In addition to securities, other things can be borrowed from; whose possible lending limits are:
|Art||Lending limit in%||Value convention|
|Savings, term credit (domestic)||100%||Credit balance , bank balance|
|Life insurance (domestic)||90%||Surrender value|
|Receivables (domestic)||60% to 80%||Face value|
|Vehicles, machines (domestic)||40% to 60%||Current value ( Schwacke list )|
The mortgage lending value of a German share traded on the regulated market is regularly identical to its market value . When shares are pledged in a securities account , the market value is EUR 50,000, so that the loan value is also EUR 50,000. The specified lending limit of 60% of the lending value is therefore EUR 30,000. The bank can then grant a loan of up to EUR 30,000 on these pledged shares. The relatively low loan-to-value limit of 60% reflects the risk of price fluctuations, which in the case of equities must be classified as high compared to other types of collateral. The share price must therefore not fall by more than 40% before the loan is no longer properly secured and subsequent collateral or repayment regulations take effect (see significant deterioration in financial circumstances ).
Collateral and capital adequacy
The lending limit (Engl. Loan-to-value cap ) is a contribution to limit losses in the failure scenario. It is a viability- related instrument of the loan portfolio and thus helps to reduce the credit risk. For this reason, loan collateral leads to relief under the conditions mentioned. If residential real estate fully fulfills the requirements of the CRR, they are assigned a risk weight of 35% of the credit (Art. 125 No. 1a CRR), for commercial real estate a risk weight of 50% applies (Art. 126 No. 1a CRR). These risk weights result in lower equity backing for real estate loans, which results in lower credit margins .
When using the sub-form of the advanced IRB approach, the group of credit collateral that can be taken into account is unlimited, provided that an institution can provide reliable estimates of its value. In this case, the credit protection also leads to a lower level of capital adequacy for other credit collateral than would be the case with pure unsecured loans.
- ↑ Hermann Kittel, Market Strategies in Mortgage Credit Business , 1974, p. 127.
- ↑ Hermann Kittel, Market Strategies in Mortgage Credit Business , 1974, p. 129.
- ^ Dieter Schneider, Investment, Financing and Taxation , 1990, p. 533.
- ^ Association of Public Banks: Treatment of Loans Secured by Real Estate , December 2008, p. 22 f.