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De-jargoned: Asset-backed securities 

September 11, 2014
Rajesh Kumar, Livemint

In an attempt to stimulate economic activity and avoid the risk of deflation, the European Central Bank (ECB) on Thursday unexpectedly reduced interest rates. The ECB also announced that it will buy asset-backed securities (ABSs) from the marketplace to improve credit conditions in the single currency zone. Mario Draghi, president of ECB, in his opening remarks at a press conference on 4 September, said “The Eurosystem will purchase a broad portfolio of simple and transparent ABSs with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme. This reflects the role of the ABS market in facilitating new credit flows to the economy….” What is it? ABS is an instrument created by securitizing loans such as credit cards, mortgages and for automobiles. Securitization is a process of pooling assets and selling the cash flows to a different set of investors. The Dodd-Frank Wall Street Reform and Consumer Protection Act (popularly known as the Dodd-Frank Act), passed by the US Congress in 2010, defined ABS as “a fixed-income or other security collateralized by any type of self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset….”

Read more: Livemint


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