The 2oo7 2oo9 crisis has shown that banking and financial structures can at times interact with macroeconomic conditions and policies (with monetary policy in particular) in ways that generate significant even disruptive systemic instability. In recent discussions two sources of risk have been identified: a prolonged expansionary monetary policy (see, eg, Taylor [45]) and a banking sector that relies heavily on credit risk transfer mechanisms, that weaken its commitment to monitor clients (as discussed, eg, by Rajan [41]). In the decade prior to the Great Turmoil both phenomena were in fact observed: central banks maintained exceptionally expansionary monetary conditions for several years, while securitization and credit risk transfer techniques expanded at an unprecedented scale.
Existing macro models are not well equipped to capture these phenomena. Members of the financial accelerator family (beginning with Bernanke, Gertler and Gilchrist [1o], BGG hereafter) typically ignore bank intermediation and model the asymmetric information problem in borrower lender relationships through a debt contract aP la Gale and Hellwig [24]. Even models that explicitly incorporate bank risk, such as Angeloni and Faia [3] or Gertler and Karadi [25], do not allow for the existence of secondary credit markets.
Conversely, the banking and corporate finance literature has extensively analyzed the incentives and pricing mechanisms of credit risk transfer markets in a micro framework (see next session for literature review), but has not explored the link between these elements and the macro economy. Since the interplay between financial micro structures and macro factors played a crucial role in the chain of events that led to the crisis, it seems important to include them explicitly in current models used for macro and monetary policy design. This can help us not only to think about macro policies, but also to study prudential measures of a structural nature, that can make the financial system more resilient.
The focus of this paper is twofold. First, it aims at creating a bridge between the macro ad the finance literature by embedding a micro founded Originate to Distribute (OTD) model of banking into a standard macro framework. This will help to analyze the interplay between the monetary transmission mechanism and the market for credit risk transfer. Second, it aims at analyzing the macroeconomic impact of some of the dis functionalities referred to above, particularly those stemming from the moral hazard problems associated with loan sales. Such dis functionalities might, indeed, have been responsible for inducing excessive risk taking behavior on the banking side and might have amplified aggregate risk.
