D is correct. Securitization involves the originating entity assembling a pool of similar loans and using that pool as the collateral for the new securities. When firms originate new loans with the intent to securitize them rather than holding them on their balance sheet, this strategy is referred to as an "originate-to-distribute" strategy. It reduces the originating entity's risks compared to the originate-to-hold strategy. First, the originating entity does not own the collateral, so it does not face credit risk. Second, there is no price risk faced by the originating entity because it does not own the individual assets included in the pool. Finally, by using illiquid loans or receivables as collateral for a securitization, the originating entity no longer holds an illiquid asset and therefore does not face liquidity risk. The risk is now spread out amongst the investors in the securities.

• A is incorrect. Securitization provides a funding vehicle for financial institutions and non-financial corporations. It is important to emphasize that it is not just banks that have used securitization. Manufacturing companies, for example, have used securitization as a risk management tool and a mechanism for raising funds.

• B is incorrect. Banks are encouraged to focus on generating the upfront commissions associated with the securitization process. The shift toward the originate-to-distribute (OTD) business model seemed to offer the financial services industry many benefits but the OTD model created moral hazard by lowering the incentives for lenders to maintain high loan underwriting standards and monitor the creditworthiness of borrowers. There is also agreement that too few safeguards were in place to offset this moral hazard.