Glossary: FI Module 18 — ABS Features and Credit Enhancement
| Term | Definition |
|---|---|
| Covered bond | A bond backed by a cover pool on the issuer’s balance sheet; dual recourse to issuer and pool |
| Credit enhancement | Mechanisms that improve the credit quality of ABS tranches beyond the underlying collateral quality |
| Subordination (credit tranching) | Internal CE where junior tranches absorb losses first, protecting senior tranches |
| Overcollateralization | Internal CE where the asset pool value exceeds the total par of securities issued |
| Excess spread | Internal CE: the difference between interest earned on the pool and interest paid to investors |
| Reserve account | Internal CE: a cash reserve set aside to absorb losses |
| Surety bond | External CE: an insurance company’s guarantee of payments on the ABS |
| Letter of credit | External CE: a bank’s guarantee to make payments if the pool cash flows are insufficient |
| Auto loan ABS | ABS backed by auto loans; amortizing structure with relatively low prepayment risk |
| Credit card ABS | ABS backed by credit card receivables; revolving structure with a lockout (revolving) period |
| Collateralized debt obligation (CDO) | A structured product backed by a diversified pool of bonds, loans, or other debt instruments |
| Waterfall structure | The priority-of-payment rules that determine how cash flows are distributed among tranches |
See also: Securitization, Credit Risk