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FRM Part I · FRM Exam Part I · Banks

Under the originate-to-distribute (OTD) model, a bank makes loans and then sells them to investors, typically through securitization. Which of the following is the primary effect of this model on the originating bank's balance sheet?

The originate-to-distribute model moves loans off the bank's balance sheet through sale to a securitization vehicle. This releases regulatory capital and funding, letting the bank originate more loans and earn fees, instead of holding the credit risk until maturity as in the originate-to-hold model.

  1. ALoans are moved off the balance sheet, freeing capital and funding for new lendingCorrect
  2. BThe bank retains all credit risk of the loans but earns higher interest income
  3. CThe bank's regulatory capital requirement rises because loans are held longer
  4. DThe bank's deposit base increases because investors deposit sale proceeds

Explanation

In the OTD model, loans are sold to a special purpose vehicle that funds the purchase by issuing securities. If the transfer qualifies as a true sale, the loans leave the bank's balance sheet, releasing capital and funding for further lending. The retained-risk option describes the traditional originate-to-hold model.

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