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Lending out vast sums against a small reserve is not necessarily bad, depending on how the deals are structured. In the US, banks issue credit in the form of c
by mediaman 6y ago
Lending out vast sums against a small reserve is not necessarily bad, depending on how the deals are structured.
In the US, banks issue credit in the form of credit cards. But they don't hold on to it. They create special-purpose entities (SPE) which then buy credit card debt, funded by bonds sold to investors. The banks do not hold on to much of the credit card debt.
The yield of these bonds issued by the SPE is commensurate with the risk of default of the credit cards. In this case, the bank issues billions and billions of credit without the reserves to handle high defaults. But it's OK, because they sell off the debt, so it can no longer directly consume their reserves.
Any losses on that credit card debt affects the value of the collateral backing the bonds issued by the SPE, not the bank. So the investors of the SPE are on the hook, but not the bank.
These bonds backed by the SPE are not rated AAA. So the real question is regulating the leverage of the investors buying the SPE bonds. But that can be handled separately, and need not restrict Ant's ability to issue microloans and then sell them off to securitized pool trusts.
- Aperocky 6y agoIt's not necessarily bad, but it can sometime be bad, and that's why there's a leverage cap to it. The new regulation did not ban ABS, it only stipulated that Ant have to have X amount of collateral before selling them.
- dillondoyle 6y agoThat sounds exactly like 2007 lol. The ratings risk assumptions and who rates them. not valuing 'unlikely' tail risk because 'no way people won't pay their mortgages' or the 'no way a virus will have force over 30% of the population functionally un/underemployed with no assistance.' And who owns the bonds? What happens when pensions, investors are hit? And who sells the derivatives and CDO 'insurance' and the meta CDO of CDO bets on the debt? My guess would be lots of bank on bank, institution on institution incest. And presumably they have to keep these assets on book at least for a bit in order to structure the tranches or whatever the credit card version of that is. I love the film Margin Call, this scene is great: "Well... sir... if those assets were to decrease by just 25 percent, and remain on our books... well... that loss would be greater than the current market capitalization of this company." "the music appears to be about to stop and we are going to be holding the biggest bag of stinking shit ever assembled in the history of capitalism?" "the music, so to speak, just slowing, if the music were to stop, as you put it, then this model would not be even close to that scenario. It would be considerably worse." " and I'm afraid... standing here tonight... that I don't hear... a... thing... just silence.
- franklampard 6y agoExactly, nothing is necessarily bad, but such a high risk is worth regulating
- athrowaway3z 6y agoHow have i never heard of this movie? Thanks for the tip.
- pfraze 6y agoThe US ran an enormous financial bailout after the pandemic started. This was when individuals got $1200. Substantially more of that money was spent ensuring corporate debt didn’t pop.