Asset-Backed Commercial Paper - Definition
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What is Asset-Backed Commercial Paper?
An asset-backed commercial paper program refers to a short-term debt offering that is backed by collateral. The paper is generally for $100,000 or more. It is an investment vehicle that is short-term with a maturity period of between 90 and 270 days.
ABCPs are different from commercial paper because they are backed collateral. The interest payment that ABCP investors get comes from the pool of assets used to back the security, such as car loans. Upon maturity of the collateralized papers, investors are given a principal payment generated from collections of the asset credit, new ABCP issuance, or liquidity facility of credit.
Academic research on Asset-Backed Commercial Paper ABCP
- The evolution of a financial crisis: Collapse of theassetbacked commercial papermarket, Covitz, D., Liang, N., & Suarez, G. A. (2013). The evolution of a financial crisis: Collapse of the assetbacked commercial paper market.The Journal of Finance,68(3), 815-848. This paper documents runs on assetbacked commercial paper (ABCP) programs in 2007. We find that onethird of programs experienced a run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to programlevel and macrofinancial risks. These findings are consistent with the asymmetric information framework used to explain banking panics, have implications for commercial paper investors degree of risk intolerance, and inform empirical predictions of recent papers on dynamic coordination failures.
- Do global banks spread global imbalances?Asset-backed commercial paperduring the financial crisis of 200709, Acharya, V. V., & Schnabl, P. (2010). Do global banks spread global imbalances? Asset-backed commercial paper during the financial crisis of 200709.IMF Economic Review,58(1), 37-73. The global imbalance explanation of the financial crisis of 200709 suggests that demand for riskless assets from countries with current account surpluses created fragility in countries with current account deficits, most notably in the United States. This paper examines this explanation by analyzing the geography of asset-backed commercial paper (ABCP) conduits set up by large commercial banks. The paper shows that banks in surplus countries as well as banks in deficit countries manufactured riskless assets, totaling over $1.2 trillion, by selling short-term ABCP to risk-averse investors, predominantly U.S. money market funds, and investing the proceeds primarily in long-term U.S. assets. As negative information about U.S. assets became apparent in August 2007, banks in both surplus and deficit countries experienced difficulties in rolling over ABCP and as a result suffered significant losses. The paper concludes that global banking flows, rather than global imbalances, determined the geography of the financial crisis.
- How effective were the Federal Reserve emergency liquidity facilities? Evidence from theassetbacked commercial papermoney market mutual fund liquidity facility, DuyganBump, B., Parkinson, P., Rosengren, E., Suarez, G. A., & Willen, P. (2013). How effective were the Federal Reserve emergency liquidity facilities? Evidence from the assetbacked commercial paper money market mutual fund liquidity facility.The Journal of Finance,68(2), 715-737. The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of shortterm credit markets and the role of central banks as backstop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differencesindifferences approach, we evaluate one of the most unusual of these interventionsthe AssetBacked Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced assetbacked commercial paper yields significantly.
- Altering Investment Decisions to Manage Financial Reporting Outcomes:AssetBacked Commercial PaperConduits and FIN 46, Bens, D. A., & Monahan, S. J. (2008). Altering Investment Decisions to Manage Financial Reporting Outcomes: AssetBacked Commercial Paper Conduits and FIN 46.Journal of Accounting Research,46(5), 1017-1055. We evaluate the manner in which sponsors of highly leveraged assetbacked commercial paper (ABCP) conduits responded to Financial Accounting Standards Board Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities an Interpretation of ARB No. 51, and its Canadian counterpart Accounting Standards Board of Accounting Guideline 15 (AcG15),Consolidation of Variable Interest Entities. By matching commercial paper investors with corporations seeking liquidity, ABCP sponsors facilitate a significant amount of shortterm, securitized financing in the United States. FIN 46 and AcG15 require sponsors to consolidate their ABCP conduits with their financial statements. We demonstrate that the volume of ABCP began to decline when FIN 46 was first proposed, and that this decline is primarily attributable to a reduction in North American banks' sponsorship of ABCP. We also demonstrate that North American banks entered into costly restructuring arrangements to avoid having to consolidate their conduits per the new accounting standards. Our results suggest that, in certain settings, accounting standards appear to have real effects on investment activity and productmarket competition.
- How do global banks scramble for liquidity? Evidence from theasset-backed commercial paperfreeze of 2007, Acharya, V. V., Afonso, G., & Kovner, A. (2017). How do global banks scramble for liquidity? Evidence from the asset-backed commercial paper freeze of 2007.Journal of Financial Intermediation,30, 1-34. We investigate how banks scrambled for liquidity following the asset-backed commercial paper(ABCP) market freeze of August 2007 and its implications forcorporate borrowing.Commercial banksin the United States raised dollar deposits and took advances from Federal Home Loan Banks (FHLBs), while foreign banks had limited access to such alternative dollar funding. Relative to before the ABCP freeze and relative to their non-dollar lending, foreign banks with ABCP exposure charged higher interest rates to corporations for dollar-denominated syndicated loans. The results point to a funding risk manifesting as currency shortages for banks engaged in maturity transformation in foreign countries.
- How effective were the federal reserve emergency liquidity facilities? evidence from theasset-backed commercial papermoney market mutual fund liquidity facility, Duygan-Bump, B., Parkinson, P. M., Rosengren, E. S., Suarez, G., & Willen, P. (2012). How effective were the federal reserve emergency liquidity facilities? evidence from the asset-backed commercial paper money market mutual fund liquidity facility. The events following Lehmans failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short-term credit markets and the role of central banks as back-stop liquidity providers to financial markets. The Federal Reserves response to financial disruptions in the United States importantly included creating liquidity facilities. Using unique micro datasets and a differences-in-differences approach, we evaluate one of the most unusual of these interventions the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Our findings indicate that this facility helped stabilize asset outflows from money market funds and reduced asset-backed commercial paper yields significantly.