As a result, the turn of the housing and credit cycles affected most severely financial institutions that did not have in place appropriate risk management processes. In particular, risk management systems that help the build-up of sufficient capital and liquidity buffers would have better protected them from disruptions to the financial markets.
Second, financial markets were in certain cases affected by misaligned incentives related to the increased adoption of the “originate to distribute” model. This model, as opposed to the traditional “lend and hold”, involves a long chain of participants from the originators to endinvestors.