2008年-ECB欧洲央行_The_incentive_structure_of_the_‘originate_and_distribute’_model_27页_839kb

Summary of "The Incentive Structure of the 'Originate and Distribute' Model"

Core Content

The report "The Incentive Structure of the 'Originate and Distribute' Model" was published by the European Central Bank (ECB) in December 2008. It analyzes the impact of the 'originate and distribute' model on the incentive structures within the structured finance market, particularly in the context of the financial turmoil that began in mid-2007. The report highlights the structural differences between the European and U.S. markets, the role of various market participants, and the challenges and risks arising from the complexity of structured finance products.

Main Points

1. Overview of the Structured Finance Market

• The structured finance market in Europe has been less prevalent compared to the U.S., but has shown significant growth over the past twenty years.
• European markets are more focused on collateralised debt obligations (CDOs) and residential mortgage-backed securities (RMBS), with a relatively lower level of asset-backed securities (ABS) and CDO issuance compared to the U.S.
• In 2007, U.S. issuance was five times higher than in Europe, with RMBS and CDOs accounting for three-quarters of total issuance.
• European RMBS issuance was more concentrated within the euro area, while the U.S. market had a more diversified structure.

2. Structural Differences

• European RMBS issuance was limited until 2002, and the market only started to grow significantly around 2007.
• The U.S. market saw a much higher volume of ABS CDO issuance, with monthly volumes exceeding USD 10 billion in 2007.
• European banks held a significant portion of U.S. structured finance products, exposing them to risks even though the market was smaller.

3. Impact of Financial Turmoil

• The turmoil was triggered by rising delinquencies in U.S. subprime mortgages, which led to dislocations in credit and money markets.
• The financial crisis exposed weaknesses in the 'originate and distribute' model, particularly related to misaligned incentives among market participants.
• Investors lost confidence due to rating downgrades and the opacity of structured finance products, leading to a freeze in public issuance and a shift towards private placements.

4. Complexity and Its Consequences

• The market showed a strong impetus for complexity, with products like ABS CDOs, CDO-squared, leveraged super-senior products, CPPI, and CPDOs becoming prominent.
• Increased complexity made it difficult for investors to assess and value risks effectively, especially as the underlying assets were not transparent.
• The valuation of complex products was heavily dependent on market prices, which became unreliable during the crisis.

5. Incentive Misalignments

• The 'originate and distribute' model creates principal-agent relationships, where agents (originators, intermediaries, third parties) may act in their own interest rather than in the best interest of principals (investors).
• Conflicts of interest can arise between originators and intermediaries, intermediaries and investors, and third parties and investors.
• Investors may not have the proper incentives to conduct their own risk assessments, relying heavily on external ratings.

6. Market Participants and Their Roles

• Originators: May reduce screening and monitoring efforts if they know the assets will be securitised.
• Intermediaries: May have conflicting interests with investors regarding risk/return trade-offs.
• Third Parties: Such as credit rating agencies, servicers, underwriters, and trustees, may not act in the best interest of investors.
• Investors: May not perform adequate risk assessment due to lack of incentives and information.

7. Key Concerns

• The crisis revealed that the 'originate and distribute' model could lead to systemic risks due to misaligned incentives.
• The role of credit rating agencies (CRAs) was scrutinized, as their delayed downgrades contributed to market instability.
• The complexity of products and lack of transparency made it difficult for investors to assess true risk levels.

Key Information

• The ECB and the Banking Supervision Committee (BSC) were tasked with assessing the incentive structure of the 'originate and distribute' model.
• The report emphasizes that while the model has delivered benefits, it is fundamentally vulnerable to misalignment of incentives.
• The financial crisis led to a re-intermediation of structured finance products into banks' balance sheets and a significant decline in issuance.
• The ECB notes that the availability and consistency of data in Europe are lower than in the U.S., complicating analysis.

Proposed Solutions

• Market Solutions: Enhancing transparency, improving documentation, and centralising information.
• Policy Measures: Reviewing remuneration schemes, enhancing corporate governance, and improving the framework for credit rating agencies (CRAs).
• Reputation Concerns: The crisis could serve as a disciplining mechanism for market participants.
• Risk Retention: Retaining some risk on the originators' balance sheets can help align incentives.
• Enhanced Scrutiny: Ongoing monitoring of structured finance products and their underlying assets is essential.

Conclusion

The report concludes that the 'originate and distribute' model, while beneficial, is prone to misaligned incentives and complex risk structures. The financial crisis has highlighted these issues, prompting the need for market and policy solutions to enhance transparency, improve governance, and ensure appropriate risk assessment and valuation. The ECB recommends measures that address these misalignments to strengthen financial stability and prevent future crises.