IDEAS home Printed from https://ideas.repec.org/p/cns/cnscwp/201019.html
   My bibliography  Save this paper

Risk-Taking and Asset-Side Contagion in an Originate-to-Distribute Banking Model

Author

Listed:
  • A. Pinna

Abstract

In a model of originate-to-distribute (OTD) banking, I show that contagion may spread before any preference shock, fire sale, or change in lending margins takes place. The drivers of contagion are opaqueness of collateral and roll-over frequency. Complexity of structured finance and poor screening of noninstitutional borrowers induce both originators and investors at different stages of the OTD chain to develop heterogeneous expectations on the future value of securitized debt. When new information on the value of collateral is sufficiently bad, overleveraged banks are unable to repay loans and the supply of liquidity by lenders in the money market shrinks in the short term. Banks with accurate pricing models are unable to roll over their collateralized loans and go bankrupt for lack of liquidity. Under some conditions the industry is able to prevent contagion to solvent institutions. In the scenario where that is not feasible, policy makers shall limit their intervention to ensuring orderly resolution of insolvent banks' default.

Suggested Citation

  • A. Pinna, 2010. "Risk-Taking and Asset-Side Contagion in an Originate-to-Distribute Banking Model," Working Paper CRENoS 201019, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201019
    as

    Download full text from publisher

    File URL: http://crenos.unica.it/crenos/node/2927
    Download Restriction: no
    File URL: http://crenos.unica.it/crenos/sites/default/files/WP10-19_0.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Crisis resolution; Originate to distribute; Contagion;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cns:cnscwp:201019. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antonello Pau). General contact details of provider: http://edirc.repec.org/data/crenoit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.