Originate-to-distribute model and UK financial institutions

Lin, Po Yu and Rose, Lee and Dhesi, Gurjeet: Originate-to-distribute model and UK financial institutions. In: Proceedings of the Challenges for Analysis of the Economy, the Businesses, and Social Progress : International Scientific Conference Szeged, November 19-21, 2009. pp. 656-665. (2010)

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Abstract

The subprime mortgage crisis has brought attention to the business model, (namely the originate to distribute (OTD) model), that a vast majority of banks have adopted. In the OTD model the originator of a loan sells it to third parties through a securitisation process. The OTD model can be an efficient risk sharing tool for financial institutions to diversify their portfolio. However, the conflict of interest between different parties and potential incentive problem has eroded the original intention of the model. Furthermore, the financial contagion effect evolving from the OTD model of lending, contributes towards a significant proportion of the credit crisis in 2008. Because of data limitation we choose to examine the OTD business model of Lloyds Banks and Northern Rock. We adopt Purnanandam’s (2008) approach using the difference-to-difference method to analyse the participation of UK OTD mortgage market pre-subprime crisis and post-subprime crisis periods. We show the difference of two UK commercial banks’ participation in mortgage market prior to the credit crisis and post-disruption period. We find that the ability of the transfer of credit risk through the OTD model encouraged the origination of inferior quality loans by the banks. We also find that the OTD model affects banks’ attitude towards risk from risk aversion to risk taking investment behaviour. We conclude that the OTD model is a positive financial innovation. However the screening incentive needs to be revised and monitored.

Item Type: Article
Journal or Publication Title: Proceedings of the Challenges for Analysis of the Economy, the Businesses, and Social Progress : International Scientific Conference Szeged, November 19-21, 2009
Date: 2010
ISBN: 978-963-06-9558-9
Page Range: pp. 656-665
Related URLs: http://acta.bibl.u-szeged.hu/57418/
Uncontrolled Keywords: Bank - Nagy-Britannia
Additional Information: Bibliogr.: 663. p. ; összefoglalás angol nyelven
Date Deposited: 2019. Apr. 25. 09:58
Last Modified: 2020. Apr. 14. 14:45
URI: http://acta.bibl.u-szeged.hu/id/eprint/57831

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