Final answer:
Financial innovation and the desire to distribute risk among various investors led banks to shift from the 'originate and hold' to 'originate and distribute' model, exemplified by the securitization of loans. The Great Recession further highlighted the fragility of this system and its impact on credit-dependent sectors.
Step-by-step explanation:
The events that resulted in the shift from the traditional banking model of "originate and hold" to a model of "originate and distribute" are closely tied to financial innovation and a changing competitive landscape. This transformation was fueled by the advent of new financial instruments and practices which facilitated the packaging and selling of loans as securities. This securitization process allowed banks to move loans off their balance sheets and distribute the risk among various investors, thereby enabling them to originate more loans without bearing the full risk of default.
The 2008-2009 Great Recession underscored the risks inherent in this system. It highlighted how a decline in asset values could stress financial institutions, leading to a severe contraction in lending and significant disruptions to economies reliant on credit. The recession prompted a critical reevaluation of banking practices and risk management strategies.
Moreover, the model is depicted in Figure 17.3, which shows banks as financial intermediaries managing the flow of deposits and loans, demonstrates the critical role of banks in the economy and the potential impact of their lending practices.