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Definition: Structured Investment Vehicle
These are non banking financial institution in the sense that they don’t accept deposit, but rather borrows money. They issue commercial paper and other short to medium term instruments and borrow money from investors. They in turn buy long term securities which provide them with higher interest rate than the cost of short term securities issued. They invest in securities which has high credit rating of the scale of AAA and BBB. They issue securities at LIBOR rate and purchase long term securities at interest rates .25 to 1 percent higher return than LIBOR. The difference rate is the profit for SIV. SIV funds are managed seasoned investment team and are almost free from interest rate and currency risk. They are also called as conduits funnelling money from one source to another and pocketing the gain.
SIV are generally less regulated and were considered to be very safe in turns of return, however the advent of 2007 recession and the crises of US subprime mortgage crisis did put a question mark on its stability. Investors fled away from securities that were backed by mortgages and lead to billions of dollars of write off for large financial institution.
Invented by Citigroup in 1988, SIV are not totally free of risk. There are chances of solvency risk if the value of long term securities declines to the value of securities issued by SIV. They is also liquidity risk with the fact they borrow short term and invest in long term bonds and securities. The out payment is early then the in payments. Again the mortgage crises led a question mark on the types of securities they invest.
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