Vocab: ABCP
[all vocab posts will be via Wikipedia unless otherwise mentioned]
Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralised by other financial assets. ABCPs are typically short-term investments that mature between 90 and 180 days and are typically issued by a bank or other financial institution. They are designed to be used for short-term financing needs.
The institution wishing to issue ABCP sells its assets to a bankruptcy-remote special purpose vehicle (SPV) or structured investment vehicle (SIV), created by financial services companies, to issue the ABCP. This allows for the issuing institution to be legally separated from the SPV.
The financial assets that serve as collateral for ABCP are ordinarily a mix of many different assets, which are jointly judged to have a low risk of bankruptcy by a ratings agency. However, in 2007-2008 many of these assets performed more poorly than expected, making buyers much less willing to purchase ABCP.
As markets became unwilling to purchase ABCP, this caused trouble for financial institutions that had relied on sales of ABCP to obtain funds for use in longer-term investments. In particular, the structured investment vehicles ('SIVs' or 'conduits') set up by some commercial banks financed their longer-term, higher-yield investing through sales of ABCP. This had been very profitable when ABCP was considered safe (so that ABCP buyers accepted a low interest rate), but forced SIVs to quickly liquidate their longer-term investments, at a substantial loss, when they were no longer able to sell ABCP. |
