Off-balance-sheet finance

This technique allows a borrower to legally raise finance (so improving its cash position) without showing any associated liability on the balance sheet.

This technique allows a borrower to legally raise finance (so improving its cash position) without showing any associated liability on the balance sheet. Because of that, it can flatter key ratios such as gearing (debt finance as a proportion of total outstanding finance). Usually a separate 'special purpose vehicle' (SPV - another company) is set up first to facilitate this type of deal.

So for example a bank may sell a package of outstanding mortgage receivables to an SPV in return for cash. The SPV raises the money needed to buy the mortgages from the bank by issuing its own 'mortgage backed securities' to investors. If the bank can persuade regulators that any subsequent claims by the SPV's creditors should be met from the pool of assets (mortgage-backed securities) held by the SPV, the associated liability remains in the books of the SPV and not the bank. As such the obligation to repay the debt issued by the SPV remains off the bank's balance sheet.

See Tim Bennett's video tutorial: What is a balance sheet?

Recommended

Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020
Intangible assets
Glossary

Intangible assets

An intangible asset is anything that a company owns that isn’t physical.
25 Sep 2020

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
The world’s fund managers are getting very bullish – be careful out there
Stockmarkets

The world’s fund managers are getting very bullish – be careful out there

The latest survey of fund managers shows them to be extremely bullish on all the same things. And that, says John Stepek, means the market is in dange…
21 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021