Cash Reserve
Structured Credit & Securitization
Definition
A cash reserve is a funded account held inside a loan, note, or securitization structure to absorb timing shortfalls, expenses, missed borrower payments, or early collateral deterioration before investor principal is affected.
Why it matters
Cash reserves are simple but powerful credit enhancement. They can bridge temporary payment delays and reduce forced enforcement. A zero reserve is not necessarily fatal, but it means the deal relies more heavily on collateral collections, excess spread, guarantees, or overcollateralization.
Common misconceptions
- •A cash reserve is not excess return; it is protection capital.
- •A reserve can be depleted before investors realize the deal is stressed.
- •Reserve size should be judged relative to payment frequency, collateral volatility, and servicer costs.
Technical details
Common reserve designs
Fixed percentage of note principal, such as 2.5% at closing.
Dynamic reserve tied to delinquency, collateral value, or concentration.
Replenishing reserve funded from excess spread before cash is distributed.