Explanation

The originate-to-distribute banking model refers to the practice where banks originate loans (such as mortgages) and then package and sell them as securities to investors, rather than holding them on their balance sheets.

Key drawbacks of this model:

• Moral hazard: Since banks don't retain the credit risk, they have less incentive to carefully screen borrowers
• Looser credit standards: Banks may approve loans they wouldn't normally approve if they were keeping the risk
• Reduced due diligence: The separation of origination from risk-bearing leads to less stringent underwriting

This was particularly evident during the 2007-2008 financial crisis, where the originate-to-distribute model contributed to the subprime mortgage crisis through relaxed lending standards.

Why other options are incorrect:

• A & B: The model affects credit standards more directly than liquidity levels
• D: The model actually leads to looser, not tighter, credit standards due to reduced risk retention

The correct answer is C because the originate-to-distribute model creates misaligned incentives that result in looser credit standards.