ERM Glossary: Credit and Liquidity enhancement

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Credit enhancement involves improving the creditworthiness of a financial obligation to provide better protect for its holders against losses due to asset default. Two general types of credit enhancement are third-party guarantees (such as guaranteed mortgages) and self-enhancement through over-collateralisation (in the case of covered bonds). A credit enhancement facility is an arrangement in which, say, a bank agrees to provide credit enhancement if needed (potentially in return for a premium).

Liquidity enhancement makes funds available if required, for other reasons than asset default, e.g. to help to ensure maturing commercial paper is repaid in a timely fashion.

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