The “search-for-yield” phenomenon is evidenced by the compression of credit spreads and the decline in market volatility over the past four years (see chart on the left of slide 3). Against this background, banks pursuing the “originate and distribute” business model met a growing base of highly receptive investors willing to include in their portfolios riskier loans repackaged into increasingly complex structured credit products.
While the “originate and distribute” business model facilitated a wider distribution of credit risk across the financial systems, there were growing concerns among the global central banking community that this model was reducing the degree of transparency concerning the ultimate location of risks in the financial system.