Question

1. When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in

   		increased liquidity risk.
   		increased interest rate risk.
   		decreased fee income.
   		decreased monitoring costs.
   		increased operating costs.

Answer 1

Answer>

Originate to hold model - This model refers to DI making loans with the intention of holding them till maturity.

Originate to distribute model - This model refers to DI making loans with the intention of selling them to other institutions /lenders.

Interest rate risk should not be increased as the reselling should occur at a better interest rate

Decreased fee income - Fee income increases in originate to distribute model

Monitoring income increases in originate to distribute model

Operating costs increases in originate to distribute model

However, Adverse selection and other reasons can cause an increase in liquidity risk.

Hence the correct answer is option A