What is Minimum Collateralization Ratio (MCR)?
Let's find out Minimum Collateralization Ratio (MCR) meaning, definition in crypto, what is Minimum Collateralization Ratio (MCR), and all other detailed facts.
The Minimum Collateralization Ratio (MCR) is the minimum amount of cash or its equivalent pledged as security for returning a loan. The type of fund is the main element in determining the minimum collateralization ratio requirement.
It’s important to note that the MCR is a legal requirement. It was put in place to protect the integrity of the market.
Furthermore, a minimum debt-to-collateral ratio allows lenders to set up a point of reference when making a decision in regards to giving out a loan. Additionally, setting a minimum debt-to-collateral ratio translates to lending only to those people that have a high chance of repaying the loans. Generally, these types of people have a minimum debt-to-collateral ratio of 2:1 or even lower.
Lenders themselves establish a minimum debt-to-collateral ratio. Although, it’s worth noting that some states inside the US require lenders to meet specific standards. For instance, the Federal Housing Finance Agency acts as a regulator for 11 Federal Home Loan Banks as well as Fannie Mae, also referred to as the Federal National Mortgage Association (FNMA), and Freddie Mac, also referred to as the Federal Home Loan Mortgage Corporation (FHLMC). In this case, it set the minimum debt-to-collateral ratio to 40% for Freddie Mac and 36% for Fannie Mae.
Another key metric that lenders look into before giving out a loan is the collateralization ratio, also known as the collateral coverage ratio (CCR) or loan-to-collateral ratio (LCR). It allows the lender to understand the size of a loan that can be given to a borrower and assess risk levels.
When they have the collateralization ratio, the lender is able to establish the measure of risk by calculating the loan-to-value (LVR) ratio. If the LVR is higher than 80%, then the loan is considered to be high-risk.
If a borrower fails to repay the loan, then the lender can collect the assets pledged as security. However, the loan will be less risky only if the proportion of the relative size of the loan and the collateral behind the loan is of a higher value.
Essentially, there is no ratio that is applicable to every situation. It greatly depends on the type of collateral and the industry you’re in.