The excess spread is a way to provide internal credit enhancement.

INTERNAL enhancements include subordination (a feature of tranching; a senior tranche is protected by subordinate tranches), overcollateralization (which includes direct equity, holdback and cash collateral account) and an excess spread. EXTERNAL refers to enhancement provided by banks outside the structure (e.g., letter of credit) or counterparties outside the structure (e.g., basket credit default swap)