Collateral risk is defined as the loss of value or inability to secure control of an asset provided to an organization as security. When using collateral, there is a risk that the value of the pledged or deposited assets obtained and secured to guarantee performance on trades will diminish, exposing the holder to financial loss. Exposure to collateral risk may significantly impact a company's overall earnings or net worth. When parties are not able to meet their financial obligations, a variety of implications associated with collateral may occur.
This tool defines collateral risk, shares leading practices to mitigate collateral risk, and provides questions to consider.