Reserve account
Asset-Backed Securities glossary · Tranching & Structural Mechanics
Definition
A funded cash account, part of the trust's credit enhancement, available to cover shortfalls.
Reserve account in plain English
A reserve account is basically a rainy-day fund sitting inside the deal — a pot of real cash set aside up front to cover the gap if the loans don't pay in enough money that month to pay the investors what they're owed. It's one of the safety cushions (called 'credit enhancement') that make the bonds safer, because losses hit this cash first before they ever reach investors. It works like the security deposit a landlord holds: if you come up short on rent, they dip into the deposit rather than losing money themselves.
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