Risk-Taking and Asset-Side Contagion in an Originate-to-Distribute Banking Model

During the Subprime crisis the entire banking industry risked collapsing under an unprecedented lack of liquidity. This work tries and find what channel allowed a relatively small systemic shock, the increased mortgage delinquency in the US housing market, to spread worldwide with such a terrific impact. I develop a model of financial contagion where banks adopting the originate-to-distribute model satisfy their liquidity needs through repurchase agreements in the money market. I assume there are no early diers in the economy, and I look at crises originating from inaccurate forecasting of asset returns by some banks. The crisis may be inefficient since accurate banks with good fundamentals are unable to roll over their debt and go bankrupt. There is room for the regulator to make accurate banks willing to rescue failing banks.