What is an excessive spot?

Excessive modest is a type of loan improvement, a practice where the company takes steps to better evaluate the credit rating agency by improving finance support for secure transaction. In the case of excessive score, the company supports loan with assets over the loan, thereby limiting the creditor's credit risk and strengthening the credit rating of the credit loan. In a simple example, the company could support a US loan (USD) of $ 100,000 with $ 120,000 assets. It is important to obtain a high credit rating for securities supported by assets, as this will allow this to sell high rating derivatives and attract investors who are interested in profits but are afraid of risks. In the pools of securities collected and wrapped for the formation of derivatives, there is also an excessive stain with the tactics that are used to make these securities look more attractive. The offer of high collateral will also facilitate the loan and ensure better loan conditions such as reduced interest rate.

One of the main disadvantages to excessive harm is who defines the value of assets. In the credit crisis, which began to explode in 2007, they were one of the most important contributors by securities supported by an asset, many of which were exaggerated. Theoretically, these products were supported by assets over their value, which significantly reduced credit risks, but when the actual value of these assets was revealed, some of them experienced a rapid downgrade in the credit rating and the panic was launched among investors.

The other problem is that if the assets are used to support the loan, the debtor does not have free and clear access to them. They cannot be sold or converted, used to support other debts or used in other ways because the creditor is contributing. It is therefore possible to combine assets in an effort to obtain a loan and reduce potential liquidity. This may cause problems when the company needs to quickly get capital or want to sell assets with decreasing Hwith additions before they trigger losses.

In general, the increase in loans began to attract controversy during the credit crisis at the beginning of 2000, as many companies began to question practice and ask if it contributed to the creation of bubbles in some areas of the market. While tools such as excess stain were initially considered valuable things to trust investors, critics suggested that they actually created a feeling of false trust that led to poor investment decisions.