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Innovation can make lending that seems risky to one party significantly less risky to another. Example: you think lending to folks with low credit scores is a

Innovation can make lending that seems risky to one party significantly less risky to another. Example: you think lending to folks with low credit scores is a risk, but I evaluate credit in a different way that lets me discover that some folks with low credit scores really are credit worthy. Note that I am not supporting Ant Financial with my comment. I have no clue how their business works. But your comment is missing a key point.

PeterisP 6y ago
The point is that we're regulating the risk you're allowing to take with other people's money. If you believe (or claim, which is a different issue) that "some folks with low credit scores really are credit worthy", then you're free to take on that risk and profit from it if you're lending your own money. However, if you're playing with someone else's money, then you do not get the privilege to make arbitrary calls on what's risky and what's not; the society has to presume that you may be mistaken or lying (especially because there's an incentive to lie), we have to discard and ignore your novel, innovative evaluations, and evaluate the risk according to some conservative measure that other people trust. I mean, it's not about being allowed or disallowed to make the loans, it's about capitalization requirements to cover the risks i.e. the need to back up your assumption that these people really are credit worthy with your own funds. Innovation on better credit evaluation can help you lose less money on bad loans, which directly impacts your profit as a lender; but it can't (or at least shouldn't) be used to justify that you deserve extra leverage so that you'd have lower capital costs; the capital requirements are there to protect others from your risk-taking.
charwalker 6y ago
And if you leverage that 100:1 (300bn:3bn) you vilate a metric ton of banking regulations and responsible practice. It's not an industry for fast change or pivot especially when you're looking at a company leveraging itself so far beyond the more average 1:1 or 50/50 for banks. \ 100x typical risk is not something most investors recognize as real let alone a sane investment. A financial advisor would ask how the fund is making a 100x return and step faaaar back from that portfolio.
- sudosysgen 6y ago
  Yup. "Move fast and break things" is not a good motto for things we literally called "too big to fail".

PeterisP 6y ago

The point is that we're regulating the risk you're allowing to take with other people's money. If you believe (or claim, which is a different issue) that "some folks with low credit scores really are credit worthy", then you're free to take on that risk and profit from it if you're lending your own money. However, if you're playing with someone else's money, then you do not get the privilege to make arbitrary calls on what's risky and what's not; the society has to presume that you may be mistaken or lying (especially because there's an incentive to lie), we have to discard and ignore your novel, innovative evaluations, and evaluate the risk according to some conservative measure that other people trust. I mean, it's not about being allowed or disallowed to make the loans, it's about capitalization requirements to cover the risks i.e. the need to back up your assumption that these people really are credit worthy with your own funds. Innovation on better credit evaluation can help you lose less money on bad loans, which directly impacts your profit as a lender; but it can't (or at least shouldn't) be used to justify that you deserve extra leverage so that you'd have lower capital costs; the capital requirements are there to protect others from your risk-taking.

charwalker 6y ago

And if you leverage that 100:1 (300bn:3bn) you vilate a metric ton of banking regulations and responsible practice. It's not an industry for fast change or pivot especially when you're looking at a company leveraging itself so far beyond the more average 1:1 or 50/50 for banks. \ 100x typical risk is not something most investors recognize as real let alone a sane investment. A financial advisor would ask how the fund is making a 100x return and step faaaar back from that portfolio.

sudosysgen 6y ago
Yup. "Move fast and break things" is not a good motto for things we literally called "too big to fail".