Banks and regulation

Glossary of bank collateral valuation terms

Most terms in bank collateral valuation come from three texts: the Capital Requirements Regulation as amended by CRR3, the EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06), and the European Standards for Statistical Valuation Methods of the European AVM Alliance. Below, each term is given with the text it comes from, a plain reading, and the practical point a lender or a model provider usually needs.

Property value

The value at which a bank recognizes residential or commercial immovable property as collateral since 1 January 2025. It must be appraised by an independent valuer, use prudently conservative criteria, be documented and stay at or below the market value. On revaluation, it must also stay at or below the higher of the value at origination and the six- or eight-year average. Our page on [CRR3 property value](/guides/crr3-property-value) works it through.

Source: CRR Article 4(1)(74a) and Article 229(1), added by Regulation (EU) 2024/1623.

Market value

"The estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without being under compulsion." Under CRR3 it caps the property value, which "is not higher than a market value for the immovable property where such market value can be determined" (Article 229(1)(d)).

Source: CRR Article 4(1)(76).

Mortgage lending value

"The value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property." Before CRR3, banks in Member States with rigorous statutory criteria could use it instead of market value. After CRR3 it survives in the transition rule for older loans (Article 495f) and in the covered bond option (Article 129(3)).

Source: CRR Article 4(1)(74).

Value at origination

The value set when the loan was granted. On revaluation, the property value may not exceed the higher of this value and the six- or eight-year average. A bank should store it as a field that is never overwritten.

Source: CRR Article 229(1)(e).

Prudently conservative valuation criteria

Criteria under which "the value excludes expectations on price increases" and "is adjusted to take into account the potential for the current market value to be significantly above the value that would be sustainable over the life of the loan". The regulation prescribes no method for the second part.

Source: CRR Article 229(1)(b).

Comparable property

The six- or eight-year average may be measured "for that property, or for a comparable property". EBA must submit a draft regulatory technical standard on what counts as comparable by 10 July 2027.

Source: CRR Article 229(1)(e) and (4).

Independent valuer

A person who "possesses the necessary qualifications, ability and experience to execute a valuation" and works "independently from an institution's mortgage acquisition, loan processing and loan decision process". The EBA guidelines add professional competence, technical skills, knowledge of the market, independence from the credit decision, and a fee that is not linked to the result (paragraph 232).

Source: CRR Article 229(1)(a); EBA/GL/2020/06, paragraph 231; Mortgage Credit Directive, Article 19(2).

Full visit

A valuation by an internal or external valuer "using full visit with internal and external assessment of the property". The default at loan origination.

Source: EBA/GL/2020/06, paragraph 209.

Desktop valuation

A valuation by a valuer without visiting the property. At origination, it is allowed only for residential property "in well-developed and mature property markets", supported by an advanced statistical model with a confidence measure, and with the valuer responsible for the result (paragraph 210).

Source: EBA/GL/2020/06, paragraphs 210 and 224.

Drive-by valuation

A revaluation approach in which the valuer sees the property from outside only. EBA paragraph 224 names it among the approaches a bank may set out in its revaluation policy.

Source: EBA/GL/2020/06, paragraph 224.

Advanced statistical model

The regulated name for an automated valuation. Neither the regulation nor the operative text of the guidelines uses the term AVM; they set criteria instead, namely that the model is property and location specific, back-tested against observed transaction prices, a large and representative sample, and up-to-date data of high quality.

Source: EBA/GL/2020/06, Section 7.4; CRR Article 208(3a), which speaks of "advanced statistical or other mathematical methods" ("models").

Automated valuation model (AVM)

The Alliance groups statistical valuation methods into four types: house price indices, single parameter valuations, hedonic models, and comparables-based AVMs. In its strict sense an AVM is the last type, a model that picks a set of comparable properties for each property it values and calculates the value from them automatically. The Alliance calls it "the only Statistical Valuation Method to provide Property-Specific Valuations". In everyday use the term also covers hedonic and machine learning models.

Source: European AVM Alliance standards, 3rd edition.

Monitoring

Checking the value of collateral on a schedule: "at a minimum once every year for commercial immovable property and once every three years for residential real estate", and more often when market conditions change significantly. Since CRR3, models may monitor under Article 208(3a), and the monitoring results may feed the property value's six- or eight-year average.

Source: CRR Article 208(3)(a).

Revaluation

Setting a new value. Approaches include desktop, drive-by, full visit and statistical models. When no review trigger has fired, a model may update the value (paragraph 226); after a possible material decline, a valuer must do it, with a model as support at most (paragraph 225).

Source: EBA/GL/2020/06, paragraphs 224 to 226.

Review trigger

Information that "indicates that the property value may have declined materially relative to general market prices". It sends the property to a valuer. Since CRR3, ESG considerations count as such an indication.

Source: CRR Article 208(3)(b).

Back-testing

Comparing a model's past values with what was later observed. The rules ask for "robust and regular back-testing against the actual observed transaction prices". The guidelines also ask banks to back-test their valuers, for example with models (paragraph 233).

Source: CRR Article 208(3a)(b)(ii); EBA/GL/2020/06, paragraphs 233 and 237(b).

Benchmark value

The value a model is tested against, which the standards define as "either a confirmed Sale Price or Surveyor Valuation". The standards add that "Asking Prices or estimated values that do not qualify as Surveyor Valuations are not considered as valid Benchmark Values."

Source: European AVM Alliance standards, section 4.6.

Hit rate

"The ratio of cases producing a valuation divided by the number of cases that meet the Input Requirements." A coverage measure. It says nothing about how close the values are.

Source: European AVM Alliance standards, section 5.1.

Forecast standard deviation (FSD) and confidence measure

A confidence measure is a per-valuation estimate of accuracy; the standards require it to be predictive, which means it can be translated into an FSD, the standard deviation of the errors expected for results at that confidence level. A value range of plus or minus one FSD is expected to hold the market value with about 68 percent confidence. The EBA guidelines require a confidence measure whenever a model supports a desktop valuation at origination.

Source: European AVM Alliance standards, section 5.3 and glossary; EBA/GL/2020/06, paragraph 210.

Exposure-to-value (ETV) and loan-to-value (LTV)

Under the standardized approach, the ETV ratio is "calculated by dividing the gross exposure amount by the property value". National LTV limits, such as the 90 percent ceiling in Slovakia or the 80 percent limit in Poland, use the national definition of the collateral value. Our page on [national rules in Slovakia, Czechia, Poland and Hungary](/guides/avm-mortgage-rules-sk-cz-pl-hu) lists the limits.

Source: CRR Article 124(6) for ETV; national macroprudential rules for LTV limits.