The resulting increase in demand for these products boosted their supply and allowed a decline in the quality of the underlying loans. Hence, securitisation and the “originate to distribute” business model became more and more attractive, which is highlighted by the fact that in 2005-06 dealer firms transferred more subprime risk to investors than was originated during this period.
In the case of credit derivatives, a further aspect heightens the lack of transparency. The vast majority of these agreements are made over the counter. This not only aggravates the misevaluation of counterparty risk, it also causes an evaluation problem concerning the systemic risk in the CDS market. This, in turn, exacerbates uncertainty and loss of confidence among market participants.