By collateral security is meant stocks, bonds, and other evidences of property deposited by the borrower to secure a loan made

to him by the bank. Such securities are deposited as a pledge or guarantee that the loan will be repaid at maturity; if not paid the securities may be sold to reimburse the lender.
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.[1][2] The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral. In a typical mortgage loan transaction, for instance, the real estate being acquired with the help of the loan serves as collateral. Should the buyer fail to pay the loan under the mortgage loan agreement, the ownership of the real estate is transferred to the bank. The bank uses a legal process called foreclosure to obtain real estate from a borrower who defaults on a mortgage loan obligation.

Concept of collateral
Collateral, especially within banking, may traditionally refer to secured lending (also known as asset-based lending). More recently, complex collateralisation arrangements are used to secure trade transactions (also known as capital market collateralization). The former often presents unilateral obligations, secured in the form of property, surety, guarantee or other as collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more liquid assets such as cash or securities, often known as margin. Another example might be to ask for collateral in exchange for holding something of value until it is returned (e.g., I'll hold onto your wallet while you borrow my cell phone). Some forms of lending are solely based on the strength of the collateral such as gold jewellery and property. Certain non-conservative lending practices such as lending against antique items or art works are also known to exist. In many developing countries, the use of collateral is the main way to secure bank financing.[citation needed] The ease of acquiring a loan depends on the ability to use assets such as real estate as collateral.

Profitability of banks Like all businesses, banks profit by earning more money than what they pay in expenses. The major portion of a bank's profit comes from the fees that it charges for its services and the interest that it earns on its assets. Its major expense is the interest paid on its liabilities. The major assets of a bank are its loans to individuals, businesses, and other organizations and the securities that it holds, while its major liabilities are its deposits and the money that it borrows, either from other banks or by selling commercial paper in the money market.

Profit Measures: Return on Assets and Return on Owners' Equity

The traditional measures of the profitability of any business are it return on assets (ROA) and return on equity (ROE). Assets are used by businesses to generate income. Loans and securities are a bank's assets and are used to provide most of a bank's income. However, to make loans and to buy securities, a bank must have money, which comes primarily from the bank's owners in the form of bank capital, from depositors, and from money that it borrows from other banks or by selling debt securitiesa bank buys assets primarily with

funds obtained from its liabilities as can be seen from the following classic accounting equation:
Assets = Liabilities + Bank Capital (Owners' Equity)

However, not all assets can be used to earn income, because banks must have cash to satisfy cash withdrawal requests of customers. This vault cash is held in its vaults, in other places on its premises such as tellers' drawers, and inside its automated teller machines (ATMs), and, thus, earns no interest. Banks also have to keep funds in their accounts at the Federal Reserve that, before October, 2008, paid no interest. However, because of the credit crisis that was occurring at that time, the Federal Reserve started paying interest on banks' reserves, although it is much less than market rates. A bank must also keep a separate accountloan loss reserves to cover possible losses when borrowers are unable to pay back their loans. The money held in a loan loss reserve account cannot be counted as revenue, and, thus, does not contribute to profits. The ROA is determined by the amount of fees that it earns on its services and its net interest income:
Net Interest Income =

Interest Received on Assets - Interest Paid on Liabilities

Interest Earned on Securities + Loans

Interest Paid on Deposits and Borrowings

Net interest income depends partly on the interest rate spread, which is the average interest rate earned on it assets minus the average interest rate paid on its liabilities.

Graph spanning 1990 - 2008 showing the percentage of selected banks reporting increased interest rate spreads of C&I loans, credit card loans, and other consumer loans over the cost of funds.