This means if a bank wants to invest in a large new project, i.e.
increase its asset largely, it has to increase owners' equity proportionality.
Asset-backed commercial paper program (ABCP program, ABCP Conduit or Conduit) is set up as a program that issues short-term liabilities, commercial papers called asset-backed commercial papers (ABCPs), to finance medium- to long-term assets. Initially, ABCP conduits were primarily sponsored by major commercial banks as a means of providing trade receivable financing to their corporate customers.
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Conduit sponsors use four different types of guarantees which provide different levels of insurance to outside investors.
The four types of guarantees, ranked from strongest to weakest, are full credit guarantees ("full credit"), full liquidity guarantees ("full liquidity"), extendible notes guarantees ("extendible notes"), and guarantees arranged via structured investment vehicles (SIV).
Moving such project off bank's balance sheet eliminates the need of increasing equity.
Through setting up ABCP conduits, banks can fund assets all by short-term liabilities.
Above all these service types, ABCP programs are commonly used by banks to free up their regulatory capitals by moving the seemingly safe assets off their balance sheet.
Traditionally, banks keep everything on their balance sheet and owners of the bank have to hold a certain amount of equity to meet the capital requirement.This form of guarantees is weaker than full credit, but from the bank's side, they can move these assets off the balance sheet.Extendible notes guarantees are similar to full liquidity guarantees with the main difference being that the conduit issuer has the discretion to extend maturing commercial paper for a limited period of time (usually 60 days or less).In general, any asset class that has been funded in the term market has been funded in a conduit, and there are a wide variety of assets that are unique to the conduit market, however, at the time of 2007, the major asset of most ABCP programs is asset-backed security backed by residential mortgages.During the mid-2000s, ABCP saw a steady rise in popularity because of their high ratings from the perspective of investors and the low borrowing rates from companies who need money.Full liquidity guarantees are similar to full credit guarantees with the main difference being that the sponsor only needs to pay off maturing asset-backed commercial paper if the conduit assets are not in default.