# Loss absorption and loss absorption

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- Post ID: 587193
- Modified: 2023-07-25T21:02:56+00:00
- Language: en

## Definition

Term used primarily in connection with certain tradable financial instruments. Banks bundle a large number of issued loans into a portfolio. This is then broken down into individual tranches; usually into three, not necessarily equal parts. - The lowest, relatively high-interest tranche (first-loss piece, also known as equity tranche) must fully bear (absorb) the loss resulting from a default of a loan in the overall portfolio. - The next-higher tranche (mezzanine tranche) only has to absorb losses if the loan defaults exceed the volume of the first-loss tranche. Its risk is therefore lower, and so is the return on this tranche. - Further, increasingly lower-risk tranches follow in the same pattern. - See credit enhancement, call, hybrid capital, originate-to-distribute strategy, reintermediation, repatriation option, repayment, early, tranche thickness, securitization, securitization structure, true sale securitization, waterfall principle. - Cf. Deutsche Bundesbank Monthly Report of April 2007, p. 16 f. (overview of the financing structure in a typical leveraged buyout and position of mezzanine creditors). Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent! University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec. Professor Dr. Eckehard Krah, Dipl.rer.pol. E-mail address: info@ekrah.com https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk https://www.jung-stilling-gesellschaft.de/merk/ https://www.gerhardmerk.de/

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