Which of the following statements is true regarding Special Purpose Vehicles (SPVs) and structured investment vehicles (SIVs)?
A)An SPV has no contingent credit risk when it sells asset-backed securities (ABS) with recourse to investors.
B)An SPV retains the rights to the loans that are used as collateral in an asset-backed security.
C)An SIV potentially has more liquidity risk than the sponsoring FI due to the short-term nature of the liabilities and their reliance on short-term funds.
D)An SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.
E)An SIV is not a lucrative or profitable as an SPV.

Question

Quizplus · Accepted Answer

SIVs typically rely on short-term funding, such as commercial paper or repo agreements, to finance the purchase of longer-term assets. This makes them vulnerable to liquidity risk if their funding sources dry up. In contrast, SPVs have no contingent credit risk when selling ABS with recourse because the investors are assuming the default risk. SPVs also typically sell the loans used as collateral in the ABS to the SPV, which then issues the ABS to investors. SPVs cannot accept deposits because they are not banks. Comparing profitability between SPVs and SIVs is not accurate as they serve different functions and have different risk profiles.

Which of the Following Statements Is True Regarding Special Purpose