Financial Glossary - "Conduit" Means "Passage" Or "Special Purpose Vehicle&
The term conduit comes from Anglo-French cunduit meaning pipe, passage, conduct.
Its etymology is in part from cunduit, past participle of cunduire to lead, from Latin conducere, in part from Medieval Latin conductus.
In financial jargon, the conduit is also known as a special purpose entity or special purpose vehicle.
This is a business entity created for a specific purpose, usually - but not always - from a financial institution.
In other words, the conduit is a legal entity (usually a limited company or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives.
For example, if a bank wants to securitize a range of home loans, these loans are given to a company vehicle specially created.
On this basis, the company issues new securities "securitized".
Outside of finance, conduit can be created for other purposes.
For example, two important players in computer business created a special purpose entity to develop a new processor.
In this way, they avoided that the processor was licensed to other companies with which ' founders' had pre-existing licensing agreements.
It is essential that these conduits do not have formal links with the parent.
Otherwise the conduits should be recognized as part of the group and their budgets should be consolidated, which would deny the transfer of risk with the securitization and the effects on capital requirements.
But if these conduits are in difficulty, as it happened with the crisis of 2007-2008, there is always a risk for the parent companies: the 'reputational damage'.
To avoid this risk the parents can be forced to reintegrate assets and liabilities of the conduit into their balance sheet.
In a world of words its important to use the right one!
Its etymology is in part from cunduit, past participle of cunduire to lead, from Latin conducere, in part from Medieval Latin conductus.
In financial jargon, the conduit is also known as a special purpose entity or special purpose vehicle.
This is a business entity created for a specific purpose, usually - but not always - from a financial institution.
In other words, the conduit is a legal entity (usually a limited company or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives.
For example, if a bank wants to securitize a range of home loans, these loans are given to a company vehicle specially created.
On this basis, the company issues new securities "securitized".
Outside of finance, conduit can be created for other purposes.
For example, two important players in computer business created a special purpose entity to develop a new processor.
In this way, they avoided that the processor was licensed to other companies with which ' founders' had pre-existing licensing agreements.
It is essential that these conduits do not have formal links with the parent.
Otherwise the conduits should be recognized as part of the group and their budgets should be consolidated, which would deny the transfer of risk with the securitization and the effects on capital requirements.
But if these conduits are in difficulty, as it happened with the crisis of 2007-2008, there is always a risk for the parent companies: the 'reputational damage'.
To avoid this risk the parents can be forced to reintegrate assets and liabilities of the conduit into their balance sheet.
In a world of words its important to use the right one!
