Asset-backed commercial paper (ABCP) is a form of commercial paper that is collateralized by other financial assets. ABCP is typically a short-term instrument that matures between 1 and 180 days from issuance and is typically issued by a bank or other financial institution.
The institution wishing to finance its assets through the issuance of ABCP sells the assets to a bankruptcy-remote special purpose vehicle ("SPV") or structured investment vehicle ("SIV"), created by a financial services company. The SPV/SIV issues the ABCP to raise funds to purchase the assets. This creates a legal separation between the entity issuing the ABCP and the institution financing its assets.
The financial assets that serve as collateral for ABCP are ordinarily a mix of many different assets, which are jointly judged to have a low risk of bankruptcy by a ratings agency. However, in 2007-2008 many of these assets performed poorer than expected, making buyers much less willing to purchase ABCP.
As markets became unwilling to purchase ABCP, this caused trouble for financial institutions that had relied on sales of ABCP to obtain funds for use in longer-term investments (see Maturity mismatch). In particular, the structured investment vehicles (SIVs) set up by some commercial banks financed their longer-term, higher-yield investing through sales of ABCP. This had been very profitable when ABCP was considered safe (so that ABCP buyers accepted a low interest rate), but forced SIVs to quickly liquidate their longer-term investments, at a substantial loss, when they were no longer able to sell ABCP.