Credit enhancement (also in German; here and there also translated as Bonitätsverbesserung)

The provision of additional collateral for – a loan in general and in particular – a special purpose entity with the main aim of improving its rating and thereby reducing the interest payment to investors – especially to buyers of tranches issued by a special purpose entity. Such collateral can also be insurance against possible loan defaults or a guarantee bond. – In the wake of the subprime crisis in 2007, sales of securitized securities suddenly faltered. The conduits now had to make use of the credit enhancement facilities granted to them by the originating banks. In accordance with the applicable voting control rule, however, the banks had not consolidated their special purpose entities, i.e. they had not included them in their balance sheets. As many institutions now had to unexpectedly save their conduits from insolvency, a very high liquidity requirement arose. Some banks got into turmoil, and central banks had to prevent the market for short-term loans from drying up by providing liquidity. – See activity-shifting, on-balance-sheet, aval, back-to-originator postulate, defeasance, guarantee, loan commitment, irrevocable, portfolio insurance, repayment, early, voting rights criterion, subprime crisis, support, tacit, securitization retention, special purpose entity consolidation. – Cf. ECB Monthly Bulletin, November 2007, pp. 18 et seq. (Impact of the subprime crisis; overviews), ECB Monthly Bulletin, December 2007, pp. 32 et seq. (Liquidity management through the minimum reserve policy during the subprime crisis), pp. 45 et seq. (Survey on lending in the context of the subprime crisis; overviews), ECB Monthly Bulletin of January 2008, pp. 16 ff. (ECB liquidity assistance), ECB Monthly Bulletin of March 2008, pp. 26 f. (IAS 39 accounting issues; overviews).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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