ABS (Asset-Backed Securities)

Asset-backed securities (ABS) are financial instruments created by pooling income-generating assets, such as loans or receivables, and issuing tradable securities backed by those cash flows. ABS turn illiquid assets into marketable securities that investors can buy and sell. They spread risk across many underlying exposures and create new investment opportunities.

Example

A bank may originate many auto loans with different interest rates and maturities. To reduce risk and free up capital for more lending, the bank pools these loans and issues an ABS. Principal and interest from the loans fund payments to ABS investors. This helps the institution manage risk, diversify its balance sheet, and improve liquidity in the market for these assets.