Auto-collateralisation

Auto-collateralisation is like when you give your toy to your friend so that they will let you play with their toy too. In the grown-up world, sometimes companies need to borrow money from banks. But the bank wants to make sure they get their money back, so they ask the company to give them something valuable, like a piece of property or something that is worth a lot of money, as collateral. This is like giving the bank your toy.

With auto-collateralisation, the company doesn't have to give the bank something valuable right away. Instead, they can use the money they borrow from the bank to buy something valuable, like stocks or bonds, and use those things as collateral instead. So it's like you borrowing your friend's toy to play with, and then using the toy to get another toy from another friend, and then giving that second toy to your first friend as collateral to borrow their toy again.

Auto-collateralisation can be helpful for companies because they might not have something valuable to give the bank right away, but it can also be risky because the value of the stocks or bonds the company buys as collateral can decrease. It's like if the toy you borrowed from your second friend suddenly became less valuable, you might not be able to borrow your first friend's toy again.