Overcollateralization
Overcollateralization is a risk management feature in secured lending in which the value of the collateral posted by the borrower exceeds the principal amount of the loan. The excess collateral acts as a cushion to absorb losses if the borrower defaults or if collateral prices fall.
The key metric is the collateralization ratio, calculated as collateral value divided by the loan amount. A
In traditional finance, overcollateralization appears in asset-backed securities, where the collateral pool provides protection against losses,
The primary benefit is reduced credit risk for lenders and broader access to credit for borrowers who
Overcollateralization interacts with liquidity and valuation dynamics. It does not remove risk entirely; extreme price shocks,