Balance SheetA holder of CDO able assets desires to (1) shrink its balance sheet, (2) reduce required regulatory and economic capital, or (3) achieve cheaper funding costs. The holder of these assets sells them to the CDO. The classic example of this is a bank that has originated loans over months or years and now wants to remove them from its balance sheet. Unless the bank is very poorly rated, CDO debt would not be cheaper than the bank’s own source of funds. But selling the loans to a CDO removes them from the bank’s balance sheet and therefore lowers the bank’s regulatory capital requirements. This is true even if market practice requires the bank to buy some of the equity of the newly created CDO.