Posted in Finance, Accounting and Economics Terms, Total Reads: 255
Definition: Pledging Requirement
Pledging requirement means any legal or a bureaucratic requirement that the securities be pledged as the collateral for the public fund deposits or some other deposits. These securities should be trade actively & marketable. Generally, treasury securities are pledged at the full face value but the commercial papers & the acceptances of a banker are taken as the 90% of their face value & the municipal securities are taken at the 80% of their face value.
Those pledging banks generally keep these pledged securities in some type of a separate account. Those securities may also be held by some different institutions which includes Federal Reserve Bank or an independent trustee. Then, they can serve as the collateral for the deposits made by the local body & the state government as well as by the federal government or by the multiple governments.
So, basically it is a legal requirement designed for securing the collateral for certain types of the deposits such as the public funds deposited by some government entity in a commercial bank. Most of the banks meet this mandate by putting aside the actively traded securities which are insured or issued by the government in a different account. They are reserved to cover the funds deposited by the government in the event of a bank default.
It is an administrative, contractual or a statutory requirement that the securities be hypothecated as the collateral for the public fund deposits or to serve as a bond or a security for the specified deposits. Securities which back the public deposits are the marketable securities such as the bonds or the treasury bills. A minimum amount of the hypothecated securities that is the pledging ratio of the securities to the public deposits should be maintained at all the times.