In his blog, John Cochrane points to SoFi, a FinTech company, as proof that banking services can be delivered by institutions without the traditional characteristics of a bank.
SoFi finances loans by selling equity. The loans are securitized and the cash is reinvested in loans. As John points out:
- A “bank” (in the economic, not legal sense) can finance loans, raising money essentially all from equity and no conventional debt. And it can offer competitive borrowing rates — the supposedly too-high “cost of equity” is illusory.
- There is no necessary link between the business of taking and servicing deposits and that of making loans. Banks need not (try to) “transform” maturity or risk.
- To the extent that the bank wants to boost up the risk and return of its equity, it can do so by securitizing loans rather than by borrowing. (Securitized loans are not leverage — there is no promise of your money back when you want it. Investors bear any losses immediately and without recourse.)
- Equity-financed banking can emerge without new regulations, or a big new Policy Initiative. It’s enough to have relief from old regulations (“FDIC-free”).
- Since it makes no fixed-value promises, this structure is essentially run free and can’t cause or contribute to a financial crisis.