Equity margin loan deals are loans to counterparties secured by
collateral in the form of equities. Credit exposure arises when the equity
collateral falls below the value of loan. During the life of the deal, the
counterparty has to give more shares (or cash) to banks or brokerage houses in
case of a fall in the share price, so that the level of the collateral amount
stays approximately the same and does not deteriorate.The
objective of this paper is to attempt to review the risks associated to margin
loan deals and propose some suggestions to factor in certain margin call delays
or liquidation uncertainties under the stressed COVID-19 situation. Moreover,
we also showed a sample practical approach to measure the tail risk of margin
loan which included the counterparty’s likely behavior under stress and used a
callable bond pricing logic to assess the likely time and moral hazard problem
of the counterparty to walk away from margin loans.
References
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