Reserve account

PrepNuggets

A method of credit enhancement where a separate account is created to accumulate emergency cash to be used if the cash flow is insufficient to service a debt.

Reserve accounts can come in 2 forms: a cash reserve fund, and an excess spread account.

A cash reserve fund is simply a deposit of cash that can be used to absorb losses.  If the cash flow from the asset is insufficient to meet the promised payments,  the cash from the account can be used to top up the difference.

With an excess spread account, the expected yield on the assets supporting the ABS is greater than the obligations on the bonds issued.

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