In connection with the subprime crisis in 2007, a demand arose that banks must include the special purpose entities they have established in their balance sheets, together with the necessary valuation allowances. – Until then, this was not mandatory under IFRS and US GAAP, even if the originator had given the conduit creditworthiness enhancing irrevocable loan commitments. Only the voting control rule was decisive. There was therefore no obligation to consolidate if there was no majority of the voting rights. – In fact, however, when the facilities were drawn down by the distressed special purpose vehicle – sales of securitized securities faltered in the wake of the subprime crisis, and the conduits ran into a liquidity bottleneck – the risks reverted to the originator, causing many institutions to flounder. – In the meantime, it is assumed that the reporting company must consolidate its special purpose vehicles. It must not merely mention the associated risks as off-balance sheet business in the “balance sheet nil”, i.e. hidden in the notes, management report, management commentary or elsewhere. This is at least true if the conduit’s claims on the originator can always arise in some way (risks-and-reward rule). – See Absence Capitalism, Activity Shifting, On-Balance Sheet, Asset-Backed Securities, Off-Balance Sheet, Claw-Back Clause, CLO Funds, Conduit Company, Single Originator Securitization, First Loss Tranche, Liquidation, Toxic Securities, Consolidation, Mezzanine Tranche Nothing, on-balance sheet, originate-to-distribute strategy, originator, residential mortgage-backed securities, redemption, early, single master liquidity conduit, voting rights criterion, support, implied, securitization securities retention, securitization structure.
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