FSA starts monitoring banks’ management of collateral

The Financial Services Authority (FSA) has started investigating how large investment banks manage their collateral, fearing they may not be ready for a sudden market downturn.

The regulator will be asking the banks about the quality of their systems for assessing collateral by checking they have sound collateral agreements, that collateral is correctly valued and appropriate haircuts are imposed, and that the correlation between collateral and the value of the underlying exposure to the counterparty, in normal and in stressed environments, is reviewed. It will also look at whether collateral can be realised quickly – and recovered quickly – if the underlying