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Alt Lending week ended 18th June 2021

 

Major Banks face further capital constraints over exposures to crypto currencies

The Basel committee on Banking supervision is apparently casting its eyes on bank’s exposures to crypto currencies. At the same time it acknowledges that the size of these exposures are small by comparison to the overall size of the banking system. It seems that they are leaning towards a capital buffer of 100% of the size of the exposure. This does seem to be unduly harsh but given the price volatility of these assets and the fact that nobody in the universe can give an objective view on their value, (answers on a postcard please) not terrible surprising. A few weeks ago I read that the total value of Bitcoin in circulation was roughly equivalent to the size of the GDP of the Russian Federation. Not an insignificant amount of money. This leads me again back to basics. Like it or not banking profitability is essentially of three major financial ratios: return on assets(ROA), return on equity(ROE) and the debt/equity ratio(leverage)  These three key numbers are intertwined and simple. Multiply ROA by the debt equity ratio and it will give you the return on Equity. How this capital buffer will be managed is anybody’s guess. After all it is an invisible asset and I am willing to bet that every single holder has a bank account and their individual exposures to cryptocurrencies as opaque as they want them to be.  My bank has never asked me about my exposure to Crypto but are still willing to give me a hefty overdraft limit?

 

SoftBank-led raise values Klarna at $ 45 billion

I have to admit that I don’t really know how Swedish Bank Klarna works but the idea seems remarkably similar to the old catalogue sales model used by Great Universal Stores and others in the mid 1900’s. They fund buy now pay later retail purchases through a kind of instalment credit. The clever thing is that their deal appears to be for the benefit of the seller. Once the goods are off the shelf Klarna collects the installments over time. Naturally the credit card companies don’t like this very much but I suppose they only have themselves to blame. Klarna says that clients are fed up with traditional interest and fee laden revolving credit propositions and who can disagree? However Klarna is not an altruistic institution and it is the buyer who is paying the financial charges which presumably are not exactly transparent at the time of purchase (I have never used this technique please correct me if I am wrong). Apparently this method of credit has become increasingly popular during lockdown. Klarna is valued at $45billion but is still loss making? The FCA are taking a look. I am not sure if that will help. What would of course be helpful to consumers, is if the sellers involved, published both the cash price and the Klarna price. Do they do this already? If so more power to them. If the prices are the same then the public are being taken for fools, again.

 

English law still a good choice after Brexit

Barnabas Reynolds of International law firm Shearman and Sterling has written quite a few interesting comment pieces in recent weeks for the Daily Telegraph. This week’s concerns the compelling  choice of either English or New York law for the preparation of international finance documents. Both systems are based on common law which also tends to reflect common sense rather than the rigid and sometimes incomprehensible interpretations of the million page long acquis. When I was arranging syndicated loans, and that was some time back, English law and the jurisdiction of the English courts was the normal choice although New York and Delaware also made appearances. Nevertheless it is still important and a very good reason to do business in London. You tend to find experts in English law in England.

Howard Tolman is a well-known banker, technologist and entrepreneur in London,

We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.

For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives.

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