structured investment vehicle

Structured Investment Vehicle

A pool of investment assets, or a specialized investment subsidiary, created by investment banks to earn high returns by moving between long- and short-term financial assets, and usually established as a paper company.

Banks may operate them directly or entrust management to hedge funds, but there is a blind spot: despite the enormous funds flowing through them, they do not appear on the parent company's balance sheet.

SIVs usually receive high-quality assets from their parent banks and, based on them, issue ABCP to raise short-term funds.

With these funds, they seek profits from the credit spread (interest rate differential) between short-term liabilities and long-term structured financial products such as Mortgage-Backed Securities or Asset-Backed Securities.

SIVs issue notes of various maturities to pursue profits from the spread between short-term funds and long-term investment products, and they raise far more funds than their capital by reissuing new notes to repay maturing liabilities.

This allows high returns with a small investment, but because they continuously raise short-term funds for long-term investment, there is a structural problem: if the continuous issuance of ABCP is disrupted, they face a liquidity crisis. In particular, since they do not appear on the parent bank's books, there are also limits to managing them in advance.

This is also why SIVs brought about the subprime mortgage crisis that caused an enormous uproar in 2008.

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Topics: The Subprime Mortgage Crisis,SPC
Up: SPC
Link:: Hankyung Economic Glossary, Investopedia link
Category: Wiki/Economy