Off-balance sheet refers to the transfer of assets and liabilities from the balance sheet of an originator to a special purpose vehicle (SPV). This is done to reduce the balance sheet risk of the originator and to free up capital for lending.
Off-balance sheet securitisation is a complex process, but it can be summarised in the following steps:
- The originator identifies a pool of assets that it wants to securitise.
- The originator creates a SPV to hold the assets.
- The SPV issues securities to investors.
- The investors receive payments from the cash flows generated by the assets.
The assets that are securitised are typically loans, receivables, or other financial instruments. The securities that are issued to investors are typically asset-backed securities (ABS).
Off-balance sheet securitisation has a number of applications, including:
- Reducing balance sheet risk: Off-balance sheet securitisation can help to reduce the balance sheet risk of an originator by transferring the assets and liabilities from the originator's balance sheet to the SPV. This can be beneficial for the originator because it can free up capital for lending and it can reduce the impact of any losses on the originator's balance sheet.
- Raising capital: Off-balance sheet securitisation can be used to raise capital for an originator. This is because the securities that are issued to investors can be used to raise capital.
- Transferring credit risk: Off-balance sheet securitisation can be used to transfer credit risk to investors. This is because the investors who purchase the securities are essentially lending money to the SPV, and they are exposed to the credit risk of the assets that are held by the SPV.
Off-balance sheet securitisation can be a valuable tool for originators, investors, and the financial system as a whole. However, it is important to note that off-balance sheet securitisation can also be risky, and it is important for investors to understand the risks before they invest in securitised products.