Fixed Income
Originator and the Starting Point of Credit Creation
Every loan begins with someone willing to lend. In securitisation and credit markets, that party is known as the originator. The originator is not just a name in a structure. It is the institution that creates credit and sets the quality of the entire transaction in motion.
Because underwriting standards and incentives begin here, the role of the originator is central to credit analysis and frequently tested in CFA and FRM exams.
What an Originator Really Is
An originator is the entity that creates the underlying loans or receivables.
It may be a bank, a financial institution, or a specialised lender. The originator assesses borrowers, sets loan terms, and initially holds the credit risk before any transfer or securitisation occurs.
In short, the originator is where credit risk is born.
Role in Loan Securitisation
In securitisation, the originator pools loans and transfers them to a Special Purpose Entity.
This transfer may be for funding, risk management, or balance sheet optimisation. However, the quality of the securitised assets reflects the originator’s underwriting discipline.
Poor origination leads to weak structures, regardless of how they are packaged.
Incentives and Risk Retention
Incentives matter greatly at the origination stage.
If the originator expects to retain some risk, it has a reason to maintain lending standards. If all risk is transferred, incentives may weaken. This issue became evident during past financial crises.
Modern regulations often require originators to retain a portion of the risk to align incentives.
Accounting and Risk Transfer
From an accounting perspective, the key question is whether the originator has truly transferred risk and control.
If significant risk remains, the loans may still be recognised on the originator’s balance sheet. Legal transfer alone is not sufficient.
This substance-over-form principle is frequently tested in exams.
Originator vs Servicer
These roles are often confused.
- The originator creates the loans
- The servicer manages payments and administration
In many cases, the same entity performs both roles, but they are conceptually distinct.
Why Analysts Focus on the Originator
Analysts evaluate the originator’s:
- underwriting standards
- historical default rates
- incentive alignment
- risk retention practices
These factors influence the performance of securitised assets long after origination.
Common Student Misunderstandings
Many students think the originator exits the picture after securitisation. Often, it does not.
Others assume securitisation removes responsibility for loan quality. It does not.
Some forget that credit risk starts at origination.
These misunderstandings often appear in exam traps.
Closing Reflection
The originator is the foundation of any credit structure. Securitisation can redistribute risk, but it cannot erase poor lending decisions. For CFA and FRM preparation, understanding the originator’s role, incentives, and risk exposure is essential. Once this perspective is clear, credit-structure questions become far easier to analyse.
