Explanation:
Switching from a buy-and-hold to an OTD model caused substantial incentives to change from making high-quality loans to generating high fees associated with increased loan volumes. Short-term attention to profit generation is nothing new and not a direct consequence of the shift. Capital adequacy was actually improved by moving loans off the balance sheet, which freed up capital to pursue origination of new loans.
(Book 1, Module 4.2, LO 4.d)
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Question 53
Securitization in the banking industry received substantial attention prior to and following the financial crisis. Banks began to switch from a traditional buy-and-hold strategy to an originate-to-distribute (OTD) model for their loan portfolio. Although there are some benefits associated with the switch, the main disadvantage associated with moving to a higher-fee OTD structure is mainly attributable to:
A
myopic focus on bank profitability.
B
reduction in capital adequacy attainment.
C
reduction in loan portfolio credit quality.
D
loan portfolio risk management.
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