Asset-backed Commercial Paper

Definition: Asset-backed Commercial Paper (ABCP) is corporate debt that is due within a year, and is backed by assets such as real estate, autos and other commercial assets. It is another example of a Collateralized Debt Obligation, or CDO, that is sold on the secondary market. Asset-backed Commercial Paper is similar to Mortgage-backed Securities, in that it is a package of loans that is resold to other investors. It includes assets other than home mortgages.

Asset-backed Commercial Paper also affects the U.S. economy in a way similar to Mortgage-backed Securities. It was created to provide more liquidity in the economy. It allows banks and corporations to sell off debt, which frees up more capital to invest or loan. The creation of Asset-backed Commercial Paper is one reason why the U.S. economy has been so robust in the last five years.

However, the downside of Asset-backed Commercial Paper is that it allows the originators of the loans to avoid having to collect on the loans when they become due, since the loans are now owned by other investors. This may make them less disciplined in adhering to strict lending standards. Like Mortgage-backed Securities that contain Subprime Mortgages, Asset-backed Commercial Paper may have less than AAA-quality loans. This makes them more susceptible to default.

Examples: The 2007 banking liquidity crisis may now be spreading to all asset-backed commercial paper.