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A silo is a specified asset (or group of assets) of a legal entity and its related liability (or liabilities) which are secured only by the specified asset(s) and for which the specified asset(s) represent essentially the only means of repayment of the debt (think nonrecourse debt). Furthermore, for a silo to exist, the returns of the assets must not be available to interest holders (not just variable interest holders) of the overall legal entity, and the liabilities must not be payable from the assets of the overall legal entity. Given these restrictions, silos should be relatively rare in practice.

For accounting purposes, the specified asset(s) and related debt, and any associated equity, are separated from the legal entity and treated as a stand-alone VIE.

Why is this important? As with specified assets in the previous step, the expected losses of a separately consolidated silo are excluded from those of the overall legal entity when evaluating the sufficiency of the legal entity’s equity investment at risk. This could have a significant impact on the determination of whether the legal entity is a VIE.

The VIE analysis of the silo must come ahead of the VIE analysis of the overall legal entity. The silo must be a VIE and must have a primary beneficiary, and therefore must be separately consolidated, in order for its equity investment at risk and expected losses to be excluded from the analysis of the overall legal entity.

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