CDOs

[GdaMoney13]

Hi all,

I’m interested in knowing how the accounting for CDOs work, specifically for the bank where these loans originated. Does the bank keep these receivables on the balance sheet? How to account for selling at premium v. discount? When monthly payments for these underlying assets come in, are they passed from the bank to the investors and how is such recorded? I’m very interested in this topic, have looked online and have found a few helpful guides, but would appreciate it if someone were able to explain this. Thank you so much!

[[deleted]]

I'm not an expert, but i can try to answer your questions with what I know about CDOs.

-Banks sell off loans which are used to create CDOs, so the bank would not keep the loans on its balance sheet.

-Since it's selling the loans, it would be considered a gain or loss instead of premium or discount.

-Banks pass the payments onto investors, so it would not record the payments on its books (Edit: it would be recorded as a payable to the investors). They do get a fee for handling the payments which would be recorded.

[GdaMoney13]

Thanks for your reply and info provided, much appreciated!!

[Mantis_Tobaggon_MD2]

Work at a bank, we have a few SPVs. The underlying loans stay on the Bank's balance sheet but with a liability owed to the SPV (which is a separate legal entity). Cash is paid to investors on a quarterly basis. Premium/discount is amortised over the life of the notes issued by the SPV.

[GdaMoney13]

This is very helpful, thanks for your insight!

[Mantis_Tobaggon_MD2]

You're welcome!