"Sure, there is a fee-based business to it all and banks can clear their balance sheet of certain kinds of risks by finding third parties to whom they can shift that risk. But shouldn’t the banks be in the business of using their own balance sheets to lend in precisely this way? Isn’t that the conceit of modern banking, that banks receive all kinds of public commitments so that they can make these kinds of loans? "
The most natural hypotheses to me are 1) agency problems inside the firm and 2) regulatory arbitrage, probably capital requirements.
"Sure, there is a fee-based business to it all and banks can clear their balance sheet of certain kinds of risks by finding third parties to whom they can shift that risk. But shouldn’t the banks be in the business of using their own balance sheets to lend in precisely this way? Isn’t that the conceit of modern banking, that banks receive all kinds of public commitments so that they can make these kinds of loans? "
The most natural hypotheses to me are 1) agency problems inside the firm and 2) regulatory arbitrage, probably capital requirements.