Why originate-to-distribute models are key to portfolio diversification

• What has led to the shift from originate-to-hold to originate-to-distribute (OTD) model, and what are the advantages that an OTD model offers to banks?
  
  
• As private lending increases, what are the main challenges that banks face in the secondary loan trading market?
  
  
• Higher interest rates have led to higher risk for banks. How can organisations improve the economic value of loans after regulatory and capital cost?
  
  
• What are the opportunities AI offers in the optimisation of portfolios, risk management and balance sheets?

When we look at the lending market, the increase of private credit institutions is one of the major challenges eating into traditional banks’ margins. In the UK alone, the private credit market was valued at £1.58 trillion in 2023 and, as more players enter the market, is projected to grow to £2.22 trillion by 2028. Seeing as private credit largely operates outside the traditional regulatory parameters that incumbent bank lenders are subject to, banks not only face increased competition, but also higher capital and regulatory cost.

Yet while competition is a significant challenge, it also poses an opportunity as many banks have scaled origination capabilities and can leverage originate-to-distribute (OTD) models to maximize profitability. Distributing more allows banks to do more business, maximise their net interest margin, and boost the economic value of loans while still owning their customer relationships. While the US already has an advanced syndication and secondary loan trading market, the OTD model has started to find a growing foothold in European organisations as well.

However, familiar challenges remain: most banks do not have the right data structures in place to optimise their balance sheets and determine the right loans to hold or distribute. Emerging AI technology can help banks identify the assets that, due to liquidity or maturity, have higher-than-usual capital costs, and determine the loans that are more profitable economically and thus should be kept on balance sheets. So how can banks start implementing the right (AI) solutions and strategies to help optimise their loan portfolios?

 

Register for this Finextra webinar, hosted in association with FIS, to join our panel of industry experts who will discuss why growing private lending puts pressure on banks, how distribution can help decrease risk and increase profitability, and how AI can help optimise balance sheets.