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Article contents
Origination and Distribution of Debt: Risks and Regulatory Solutions
Published online by Cambridge University Press: 20 January 2017
Abstract
This article focuses on misaligned incentives in the lending process caused by the shift from the traditional relationship banking model to a more transaction-oriented ‘originateto-distribute’ model of bank finance as one of the major factors contributing to the financial crisis of the years 2007–2009. Based on a theoretical analysis of banks as financial intermediaries and the agency costs involved if banks distribute assets they have created to other parties in the financial system, empirical studies are reviewed which demonstrate that market mechanisms apparently contain these agency costs in loan syndications and loan sales, but failed to do so in securitisations during the years before the onset of the financial crisis. The EU has already reacted to this breakdown of market mechanisms by an amendment to the Capital Requirements Directive with the purpose of aligning incentives in securitisation transactions by getting more securitiser ‘skin in the game’. Similar legislation has been adopted in the US. This article places the EU and US response to perceived shortcomings in securitisations in the context of the theoretical and empirical literature and discusses alternative regulatory solutions.
- Type
- Symposium on the Financial Crisis in the EU (Part 1)
- Information
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- Copyright © Cambridge University Press 2010
References
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80 Directive 2009/111/EC amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management, OJ 2009 L 302/97.
81 Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (recast), OJ 2006 L 177/1.
82 Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions (recast), OJ 2006 L 177/201.
83 Art. 122a(8) Banking Consolidation Directive (as amended).
84 Article 13 of the Commission Proposal for a Directive of the European Parliament and of the Council on Alternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC, COM(2009) 207 final.
85 Art. 122a(7) Banking Consolidation Directive (as amended).
86 Art. 122a(4) Banking Consolidation Directive (as amended).
87 Public Law No. 111-203.
88 15 USC. §78a et seqq.
89 Section 941 Dodd-Frank Act.
90 Sections 942, 943 Dodd-Frank Act.
91 Data provision used to be at pool-level: Fender/Mitchell, supra note 47, at p. 35.
92 Ingo Fender and Janet Mitchell, “Incentives and Tranche Retention in Securitization: A Screening Model”, 1 September 2009, BIS Working Paper No. 289, available on the Internet at <http://ssrn.com/abstract=1481663> (last accessed on 25 July 2011); John Kiff and Michael Kisser, “Asset Securitization and Optimal Retention”, 1 March 2010, IMF Working Paper No. 10/74, available on the Internet at <http://ssrn.com/abstract=1578672> (last accessed on 25 July 2011). See also International Monetary Fund, Global Financial Stability Report. October 2009, supra note 3, at pp. 101 et sqq. (Box 2.7. Optimal Retention Policies for Loan Securitization) and Fender/Mitchell, supra note 47, at pp. 37 et sqq.
93 The Economist, “Securitisation: Earthbound”, 25 March 2010.
94 Similarly Fender/Mitchell, supra note 47, at p. 41.