The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Question

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The statement is true. The ability to sell off asset-backed securities in a liquid secondary market encouraged financial institutions to adopt an originate-to-distribute strategy, where they originated loans and then sold them off to investors rather than keeping them on their own balance sheets. This strategy allowed them to earn fees and generate income without taking on the risks of holding the loans themselves.

The Availability of a Liquid Secondary Market for Asset-Backed Securities