The adequacy of collateral in this respect is ensured via the following pillars: (i) market valuation should be the rule whenever possible, (ii) proper legal due diligence both as regards the asset to be accepted as collateral and also as regards the collateralisation technique used (iii) there should be minimum credit quality requirements and stringent rules and performance monitoring for all systems used to assess the credit quality of eligible assets and (iv) risk control measures, normally in the form of haircuts.
The Reserve Bank recently analysed data on banks’ loss rates, by LVR category, over the period from 2008 to 2012. The increase in loss rates followed a fall in nominal house prices of around 10 percent from their peak in 2007.