Originate to distribute model – distributed fear rather than risks

Alex Weber, President of Bundesbank in his recent speech says:

It has now become clear that the “originate and distribute” model can actually improve the resilience of the financial system if, and only if, a high-quality standard is maintained at all levels of the transfer process, and no new concentrations of risk arise. Since the outbreak of the financial crisis, however, we have learned about a series of distorted incentives, which manifested themselves in lax origination standards for products such as subprime mortgages and in some investors’ excessive reliance on credit ratings. In the end, securitisation, as Claudio Borio from the BIS aptly put it in 2008, has, ultimately, “distributed fear rather than risks”

🙂 He also touches on the initiatives taken in Germany and issues for monetary policymakers:

In my view, monetary policymakers should not view boom and bust episodes on the financial markets as unrelated events. Monetary policymakers’ responses to upturns as well as to downturns on the asset markets influence the risk perception of the market participants. Therefore, an (expansionary) monetary policy response which is stronger in the downswing than the (restrictive) response in the upswing creates adverse incentives for investors which could increase the amplitudes of the financial cycle.

A more symmetric approach by monetary policymakers would treat boom and bust episodes not as isolated events but would try to look through the financial cycle in order to steady policy. To be more specific, a more symmetric policy would also consider implicit risks in times when money and credit growth is dynamic, asset prices go up and risk perceptions decline, possibly weighing the need to act despite low current consumer price inflation rates.

This, however, does not mean that monetary policy should downgrade the price stability objective for the sake of other objectives. Indeed, financial crises heighten the volatility of macroeconomic variables such as inflation and growth. Rather, it means that central banks should take a longer-term perspective which takes into account the future inflationary consequences of such unfavourable developments. Given the macroeconomic relevance of financial crises, we have good reason to enlarge our monetary policy time horizon and give low-frequency movements in credit and monetary aggregates more weight in our analytical frameworks and our monetary policy decision-making processes.

Being from Bundesbank, a push for using monetary aggregates is obvious and timely.

One Response to “Originate to distribute model – distributed fear rather than risks”

  1. vineet sarawagi Says:

    BUt still its always better to go creative and utilize everything that’s possible. but again this is the time to make thing possible i.e use even those things that are tough to be used, so it’s a very good thing, but one should know about brinkmanship.

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