This essay analyzes the new credit market in terms of alternative business models for financial intermediation, competition between these models, and their evolution in response to open market dynamics. Viewing the financial economy in terms of business models makes it easier to understand why credit has contracted and why the traditional tools of monetary, credit, and banking policy have not revived lending. A business model is a set of propositions that, in miniature, states a firm's economic logic and the rationale for its structure.' I focus on business models for financial intermediaries like banks and insurance companies because these firms play a key role in the economy.' They direct funds between savers and consumers based on the holding preferences of market participants for risk, term, and liquidity.' This makes them the circulatory system of the economy and an interface between the real economy, which produces real goods and services, and the financial economy, which traffics in intangible claims like money and debt.
After explaining the concept of a business model, I examine an ongoing tension between two dominant approaches used by financial intermediaries: the originate to distribute ("OTD") model and portfolio lending.' The current financial crisis is forcing managers to rethink basic assumptions about their business lines; among financial firms, much of this deliberation deals with the conflict between these two business models. The business models of financial firms face two special constraints that I then address: the dyadic relationship to federal financial regulators and the challenge of new liquidity dynamics in the credit market. I make two points about these constraints. First, when trying to stabilize financial markets, the federal government targeted the way that these firms finance themselves, most recently, reflecting that their borrowing patterns-both those of banks and non-bank financial institutions-have systemic consequences requiring federal involvement.' Second, these business models adapted to the liquidity trends in the new credit market by investing more heavily in secondary credit markets, which then grew in importance and impact. Rather than reaching any normative conclusions, the point of my essay is to suggest a conceptual approach to better understanding causation in credit markets.
Jose M. Gabilondo,
So Now Who is Special? Business Model Shifts Among Firms that Borrow to Lend
, 5 J. Bus. & Tech. L. 101
Available at: http://ecollections.law.fiu.edu/faculty_publications/82