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1. Introduction
Historically, banks used deposits to fund loans that they then kept on their balance sheets until maturity. Over time, however, this model of banking started to change. Banks began expanding their funding sources to include bond financing, commercial paper financing, and repurchase agreement (repo) funding. They also began to replace their traditional originate-to-hold model of lending with the socalled originate-to-distribute model. Initially, banks limited the distribution model to mortgages, credit card credits, and car and student loans, but over time they started to apply it to corporate loans. This article documents how banks adopted the originate-to-distribute model in their corporate lending business and provides evidence of the effect that this shifthas had on the growth of nonbank financial intermediation.
Banks first started "distributing" the corporate loans they originated by syndicating loans and also by selling them in the secondary loan market.1 More recently, the growth of the market for collateralized loan obligations (CLOs) has provided banks with yet another venue for distributing the loans that they originate. In principle, banks could create CLOs using the loans they originated, but it appears they prefer to use collateral managers-usually investment management companies-that put together CLOs by acquiring loans, some at the time of syndication and others in the secondary loan market.2
Banks' increasing use of the originate-to-distribute model has been critical to the growth of the syndicated loan market, of the secondary loan market, and of collateralized loan obligations in the United States. The syndicated loan market rose from a mere $339 billion in 1988 to $2.2 trillion in 2007, the year the market reached its peak. The secondary loan market, in turn, evolved from a market in which banks participated occasionally, most often by selling loans to other banks through individually negotiated deals, to an active, dealer-driven market where loans are sold and traded much like other debt securities that trade over the counter. The volume of loan trading increased from $8 billion in 1991 to $176 billion in 2005.3 The securitization of corporate loans also experienced spectacular growth in the years that preceded the financial crisis. Before 2003, the annual volume of new CLOs issued in the United States rarely surpassed $20 billion. After that, loan securitization grew rapidly, topping $180 billion in...