L-Shaped Retention
Asset-Backed Securities glossary · Regulatory, Syndication & Live Deal Processing
Definition
Hybrid risk retention combining a vertical strip and a horizontal slice to meet the 5% requirement.
L-Shaped Retention in plain English
When a bank bundles thousands of loans and sells them off as bonds, regulators force it to keep 5% of the deal on its own books, so it still loses money if the loans go bad and can't just dump garbage on investors. There are two basic ways to keep that 5%: a 'vertical' strip (own 5% of every layer, top to bottom) or a 'horizontal' slice (own the riskiest 5% that gets hit first). L-shaped retention mixes both, a little vertical and a little horizontal, so on a chart the kept piece looks like the letter L. Think of a chef required to eat 5% of every dish they serve: they can take one bite of every plate, eat one whole plate first, or do a bit of each.
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