What Is Structured Finance?

Structured finance is a type of financial lending instrument used in situations when a company or institution has complicated 澳洲幸运5开奖号码历史查询:financing needs. It uses securitization to create asset pools and form complex financial instruments, usually in cases that deal with large financial institutions or corporations, and in which conventional financial products such as small loans and mortgages are insufficient.

Since the mid-1980s, structured finance has become popular in the finance industry. 澳洲幸运5开奖号码历史查询:Collateral✨ized debt obligations (CDOs), 澳洲幸运5开奖号码历史查询:credit default swaps (CDSs), synthetic financial instruments, 澳洲幸运5开奖号码历史查询:collateralized bond oblig𒉰ations (CBOs), and 澳洲幸运5开奖号码历史查询:syndicated loans are all examples of structured finance instruments.

Understanding Structured Finance

Structured finance is typically used by borrowers—mostly extensive corporations—that have highly specific needs that a simple loan or another conventional financial instrument will not satisfꦡy. An example of a situation in which a corporation might look to structured finance is if it is seeking to borrow a significant sum of m♈oney or raise capital for a specific purpose.

In most cases, structured finance involves one or several discretionary transactions to be completed; as a result, evolved and often risky instruments must be implemented. As such, th🌞e core principle of structured finance is securitization of assets and asset pools.

Benefits of Structured Finance

Structured financial products are typically not offered by traditional lenders. Generally, because structured finance is required for major capital in𒐪jection into a business or organization, i𝔍nvestors are required to provide such financing. Structured financial products are almost always nontransferable, meaning that they cannot be shifted between various types of debt in the same way that a standard loan can.

Increasingly, structured financing and 澳洲幸运5开奖号码历史查询:securitization are used by corporations, governments, and financial intermediaries to manage risk, develop financial markets, expand business reach, and design new funding instruments for advancing, evolving, and complex emerging markets. For these entities, using structured financing transforms 澳洲幸运5开奖号码历史查询:cash flows and reshapes the liquidity of financial 澳洲幸运5开奖号码历史查询:portfolios, in part by transferring risk from sellers to buyers of the structured products. Structured finance mechanisms have also been used to help financial institutions remove specific assets from their 澳洲幸运5开奖号码历史查询:balance sheets.

Examples of Structured Finance Products

When a standard loan is not sufficient to cover the unique transactions dictated by a corporation’s specific operational needs, a number of structured finance products may be implemented. Along with CDOs and CBOs, 澳洲幸运5开奖号码历史查询:collateralized mortgage ob꧟ligati🦄ons (CMOs), 澳洲幸运5开奖号码历史查询:credit default swaps (CDSs), and 澳洲幸运5开奖号码历史查询:hybrid securities, are often used, combining e𒆙lements of d♉ebt and equity securities.

Securitization is the process through which a financial instrument is created by combining financial assets, commonly resulting in such instruments as CDOs, 澳洲幸运5开奖号码历史查询:asset-backed securities (ABSs), and 澳洲幸运5开奖号码历史查询:credit-linked notes (CLNs). Various tiers of these repackaged instruments are then sold to investors. Securitization promotes 澳洲幸运5开奖号码历史查询:liquidity and is used to develop the structured financial products used by qualified businesses and other custom☂ers. There are many benefits of securitization, including being a less expensive source of fundi🅺ng and better use of capital.

澳洲幸运5开奖号码历史查询:Mortgage-backed securities (MBSs) are a model example of securitization and its risk-transferring utility. Mortgages may be grouped into one large pool, leaving the issuer the opportunity to divide the pool in𝔉to pieces that are based on the risk of default inherent to each mortgage. The smaller pieces may then be sold to investors.

The Bottom Line

Structured finance is a financial instrument available to large financial institutionဣs or companies that have complex financing needs that cannot be ordinarily solved with conventional financing. It is used to manage risk and develop financial markets for complex emerging markets. Forms of structured finance can include collateralized debt obligations (CDOs), synthetic financial instruments, collateralized bond obligations (CBOs), and syndicated loans.