In fact, the originate-to-distribute model has stymied one of the essential functions of banking: the extraction of valuable information to allow proper discrimination between borrowers. This business model has been highly fashionable in certain countries, but not in all. The Spanish banking system has not adopted it, and the model here has continued to be a traditional banking one with closeness to bank customers, detailed knowledge of them and the forging of links over time being some of its defining characteristics. 2  BIS Review 62/2008  True, Spanish banks have made considerable use of asset securitisation, but to a totally different end than those banks which developed the originate-to-distribute model. As conceived by Spanish banks, asset securitisation was not a business in itself but a mechanism to obtain additional funding. In this way, risks were not transferred to the financial markets but were retained on the balance sheets of the banks granting financing, and the perverse incentives under the originate-to-distribute model were thus avoided. Second lesson: on the use of complex products that are difficult to assess and lacking in transparency The process of asset securitisation has also differed across banking systems as concerns the complexity of the products developed. The second key aspect of the turbulence is that some international banks, particularly when securitising US subprime mortgage loans, used highly complex structured products that are difficult to assess and lacking in transparency.
And second, because prudential supervision was not sufficiently active in detecting and preventing this type of instrument. None of these elements has been present in the Spanish banking system, which explains why Spanish banks have no exposure to these vehicles. Spanish banks have obtained sufficient profits pursuing their traditional and typically retail activity, meaning they have had no great interest in developing either the structures or products that are at the root of the current problems. The Banco de España has been categorical regarding its requirement that these vehicles be consolidated for accounting and capital purposes. Today, following the application of International Financial Reporting Standards in 2005, this requirement to consolidate conduits and SIVs is now very clear. But even before the IFRSs came into force, Spanish banks had no incentive to develop these off-balance sheet vehicles, because the Banco de España always analysed the risks assumed by banks from a consolidated perspective. Fourth lesson: on the procyclicality of banking regulation The fourth lesson to be drawn from the turbulence is related to the debate that has reopened on international markets about the way in which financial regulation should address so-called procyclicality. In particular, concern has been raised about Basel II and international accounting standards. We should perhaps begin by acknowledging that financial market participants themselves behave in a procyclical way, as they tend at favourable times in the cycle to forget about the consequences of an excessive build-up in risks.