edu: off balance sheet financing and SPV

--off balance sheet is to finance while aovid taking it on its own balance sheet --a common approach is SPV --Under most accounting regimes, if a sponsoring firm wholly owns an SPV, the SPV's balance sheets is consolidated into its own. Rather than have the SPV appear on its balance sheet as an asset, the sponsoring firm has all the SPV's individual assets and liabilities appear on its balance sheet just as if they were the sponsoring firm's assets and liabilities. This is on-balance sheet financing, which largely defeats the purpose of the SPV. For this reason, a sponsoring firm typically takes only a partial ownership position in the SPV. In other arrangements, it takes no ownership interest in the SPV whatsoever. --A pass-through is a security issued by a special purpose vehicle. The SPV holds assets and pays the pass-through's investors whatever net cash flows those assets generate. In this way, the SPV's assets and liabilities are automatically cash matched, so there is no asset-liability risk. Many securitizations are structured as pass-throughs. See, for example, the discussion of mortgage pass-throughs. --Off-balance sheet financing has other applications. SPVs can be used in tax avoidance. Banks use off-balance sheet financing to achieve reductions in their regulatory capital requirements. This is a compelling reason for many securitizations. It is also the purpose of trust preferred securities. --Off-balance sheet financing also affords considerable flexibility in financing. An SPV doesn't utilize the sponsoring firm's credit lines or other financing channels. It is presented to financiers as a stand-alone entity with its own risk-reward characteristics. It can issue its own debt or establish its own lines of credit. Often, a sponsoring firm overcapitalizes an SPV or supplies it with credit enhancement. In this circumstance, the SPV may have a higher credit rating than the sponsoring firm, and it will achieve a lower cost of funding.