Definition of SPV
Special Purpose Vehicles, Regulators world-wide require banks and other lenders to hold sufficient capital to cover any expected losses. Mortgage business is low margin business. So although in bulk it can be profitable, it can tie up a bank's capital which could otherwise be used for more profitable business. Over the years, banks have found ways to shift this business off their balance sheets by moving the mortgages and their funding into a Special Purpose Vehicle (SPV). These SPVs often get their funding by issuing bonds which are purchased by other banks. The SPV is, in effect, designed to insulate the issuer of the bonds from the sponsor, or originator, of the assets (mortgages). This process of moving the mortgages into a SPV and financing the loans with a bond is known as securitisation and the bonds are known as Asset Backed Securities (ABS).
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