Definition of SIV
Structured Investment Vehicle. Some banks set up structured investment vehicles (SIV) - funds which exist to borrow money by issuing short-term securities at low interest rates and then use the money to buy long-term securities at a higher interest rate, making a profit for investors from the difference. SIVs typically invest in a range of asset-backed securities. The risk that arises from the transaction is twofold. First, the solvency of the SIV may be at risk if the value of the long-term securities that the SIV has bought falls below that of the short-term securities that the SIV has sold. Second, there is a liquidity risk, as the SIV borrows short term and invests long term - ie out-payments become due before the in-payments are due. Unless the SIV can refinance short-term at favourable rates, it may be forced to sell the long-term security into a depressed market.
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