The rise of the originate-to-distribute model and the role of banks in financial intermediation
This is the second article in a series which explores the changing role of banks in the financial intermediation process. It accompanies a Liberty Street Blog series. Both discuss the complexity of the credit intermediation chain associated with securitization and note the growing participation of nonbank entities within it. These series also discuss implications for monitoring and rulemaking going forward. In this article, the authors show that, beginning in the early 1990s, lead banks increasingly used the originate-to-distribute model in their corporate lending business and that the ...
The introduction of the TMPG fails charge for U.S. Treasury securities
The TMPG fails charge for U.S. Treasury securities provides that a buyer of Treasury securities can claim monetary compensation from the seller if the seller fails to deliver the securities on a timely basis. The charge was introduced in May 2009 and replaced an existing market convention of simply postponing?without any explicit penalty and at an unchanged invoice price?a seller?s obligation to deliver Treasury securities if the seller fails to deliver the securities on a scheduled settlement date. This article explains how a proliferation of settlement fails following the insolvency of ...
Bank loan sales: a new look at the motivations for secondary market activity
Bank lending traditionally involves the extension of credit that is held by the originating bank until maturity. Loan sales allow banks to deviate from this pattern by transferring loans in part or in their entirety from their own books to those of another institution. This paper uses a new methodology to test the validity of two hypotheses regarding banks' motivations for selling and buying loans: (1) the comparative advantage hypothesis, that banks with a comparative advantage in originating loans sell and those with a comparative advantage in funding loans buy, and (2) the diversification ...
Long-Term Finance and Investment with Frictional Asset Markets
Trading frictions in financial markets affect more long- than short-term bonds generating an upward sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the US, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves ...
Commentary: improving secondary markets in rural America
Improving secondary markets in rural America
Bank capital regulation and secondary markets for bank assets
The paper derives optimal capital requirements, when the bank?s quality is private information. The supervisor can inspect the bank and punish the undercapitalized one with recapitalization and downsizing. The cost of bank?s capital and its ability to sell its assets are crucial for the bank?s incentive to reveal its quality truthfully. The paper provides following policy implications. First, sensitivity of capital requirements to the bank?s quality should be low in good times and high in bad times. Second, a leverage ratio should be accompanied by a requirement that the bank selling its ...
The securitization of housing finance
Since 1970, housing finance has undergone a radical transformation due to the securitization of mortgage loans. As the market for mortgage securities continues to grow and develop, this transformation raises a number of important public policy issues.
Developments in the secondary mortgage market