Asset-Backed Security (ABS)

An asset-backed security (ABS) is a type of investment backed by a pool of underlying assets — typically loans or receivables that generate cash flows. Common collateral includes auto loans, credit card receivables, student loans, equipment leases, and home equity loans (but not first-lien mortgages, which back mortgage-backed securities). The process of creating ABS is called securitization: a bank or lender originates loans, pools them together, and sells interests in the pool to investors as tradeable securities. ABS are typically structured in tranches with different risk/return profiles — senior tranches get paid first and carry AAA ratings, while subordinate tranches absorb losses first but offer higher yields. The ABS market exceeded $1.5 trillion in outstanding issuance as of 2025, making it a critical source of financing for consumer lending.