FRM Part I · FRM Exam Part I · Banks
In a typical securitization, what is the main purpose of the special purpose vehicle (SPV) that purchases the loans from the originating bank?
The SPV's main purpose is to isolate the pooled loans from the originator's bankruptcy risk. Being bankruptcy-remote, it lets investors rely on the pool's cash flows rather than the originator's credit standing. It does not guarantee tranche returns or provide deposit insurance.
- ATo isolate the pooled assets from the originator's bankruptcy riskCorrect
- BTo guarantee returns to the senior tranche holders
- CTo increase the originator's capital requirements
- DTo provide deposit insurance for the loan pool
Explanation
The SPV is a bankruptcy-remote entity, so asset-backed securities depend on pool performance rather than the originator's solvency. It does not guarantee returns, raise capital requirements, or provide deposit insurance.
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