The « originate to hold » model corresponds to the traditional banking system, where the financial intermediary offering a loan will keep it on its balance sheet until maturity, i.e., until the principal and interest have been repaid in full. It is therefore a risky long-term investment that appears on the bank’s balance sheet as an asset. If the repayment schedule is more than 90 days overdue, the loan becomes a non-performing loan and the value of the asset on the balance sheet must be written down. If the debtor defaults, the value of the asset is written off to zero.
Conversely, in the « originate to distribute » model, the financial intermediary does not keep the loan it has just issued on its balance sheet but transforms it into a financial asset sold on the market. The loan thus securitized corresponds to a debt security held by the buyer against the borrower in exchange for risk compensation via regular interest payments. The institution simply selects the borrower but no longer bears the risk and is only remunerated at the time of the transaction. In practice, the financial intermediary keeps these assets on its balance sheet for a few weeks, until (i) there are enough of them to be sold as a group (« repackaging ») and (ii) they are rated by a rating agency to indicate the quality of the asset to investors. If the intermediary is a bank, these assets appear temporarily in the category of « financial assets held for trading » or « assets held for trade. »
Thibaut D.
