// definition
Collateral
An asset pledged to secure borrowing
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Short definition
An asset pledged to secure a debt. If the borrower fails to meet its obligations, the lender may realise the asset under the contract and applicable law. For Eurosystem operations, collateral must be eligible and its recognised value reflects haircuts and other risk controls. Pledging collateral provides borrowing capacity without creating bank equity.
risk atlas
Knowledge map
Intuition
The value of an asset a bank owns and the borrowing it can support are different measures.
Formula
simplified coverage = sum, for each eligible asset, of its value × (1 - its haircut as a fraction), excluding further adjustmentsRelated analyses
Primary sources
- ECB, What is collateral?Pledged assets and realisation following a default.
- ECB, What are haircuts?Post-haircut value and coverage of borrowing.