What Is a Flow Agreement

A flow agreement is a term used in the financial industry, specifically in the world of structured finance.

In a flow agreement, a financial institution or investor agrees to purchase a certain amount of securities, such as loans or mortgages, from another financial institution or originator. This can be beneficial to both parties, as the originator can use the capital raised from the sale to fund future loans, while the investor gains access to a diversified pool of assets.

Flow agreements are often used in securitization, which is the process of creating securities from pools of assets such as loans or mortgages. This can provide the originator with a way to monetize their assets and free up capital for other investments.

Flow agreements can also be used in the context of asset-backed commercial paper (ABCP), which is a short-term debt instrument that is backed by pools of assets. In this case, a bank or other financial institution may use a flow agreement to sell their assets to a special purpose vehicle (SPV) that issues the ABCP.

One potential downside of flow agreements is that they can be subject to legal and regulatory challenges if the underlying assets, such as loans or mortgages, are of poor quality or there are concerns about the accuracy of documentation. This was seen during the financial crisis of 2008, when many financial institutions faced legal challenges and losses due to the subprime mortgage crisis.

Overall, flow agreements can be a useful tool for financial institutions and investors looking to access a diverse pool of assets. However, it is important to conduct proper due diligence and consider the potential risks before entering into a flow agreement.