The Relation between Bank Credit-Risk Management Procedures and Originate-to-Distribute Mortgage Quality During the Financial Crisis

48 Pages Posted: 21 Apr 2015 Last revised: 14 Jan 2020

See all articles by Gauri Bhat

Gauri Bhat

Southern Methodist University (SMU) - Accounting Department

Jian Cai

Washington University in St. Louis

Date Written: January 2020

Abstract

We examine the relation between bank risk management procedures and sales of mortgages during the financial crisis of 2007-2009. Research suggests that banks employing an originate-to-distribute strategy devoted little effort to screening thereby diminishing their ability to sell loans during the crisis. We find banks with stronger credit risk management suffered a smaller decline in loan sales, had fewer non-performing mortgage loans and relied less on mechanical screening techniques while granting loans than banks with weaker credit risk management. Numerous additional tests and robustness checks including a matched sample analysis are employed to address endogeneity and confirm our main findings. Overall, our evidence implies that the incentive problems associated with the originate-to-distribute business model are less severe in the presence of stronger risk management.

Keywords: Originate-to-distribute; risk assessment procedures; financial crisis

JEL Classification: G11; G12; G13; G14; G21; G32

Suggested Citation

Bhat, Gauri and Cai, Jian, The Relation between Bank Credit-Risk Management Procedures and Originate-to-Distribute Mortgage Quality During the Financial Crisis (January 2020). Available at SSRN: https://ssrn.com/abstract=2596746 or http://dx.doi.org/10.2139/ssrn.2596746

Gauri Bhat (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-7682964 (Phone)

Jian Cai

Washington University in St. Louis ( email )

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