Tuesday, June 12, 2012

Sound Banking System (4) Loan Brokerage

2. Loan Brokerage Banks
The second type of bank provides a loan brokerage service. These banks would match the savings of depositors who want to lend with people who want to borrow. Each loan would be matched with a deposit or group of deposits for the same term. Every deposit received and every loan made would have a timestamp. The Loan Brokerage Bank would have to match every loan for a particular term with equivalent deposits for the same term.

Interest rates for the various terms would adjust until the supply of deposits matched the demand for loans for each possible term. The bank would charges either a fee or a margin on the interest rate to cover the cost of providing this service. Sometimes the bank will combine a number of deposits together to make up a large loan. This would be part of the brokerage service.

Loan brokerage banks would usually take responsibility for assessing the credit-worthiness of potential borrowers and the viability of the projects for which they are borrowing. If the bank agrees to take responsibility for any bad debts or fraud that may occur, the cost of this service would be built into the bank's charges. Different banks would offer different options with different levels of service.

Brokerage Banks would provide a re-financing service for people who have placed money in a bank for a fixed term. The bank would have been lent the money out to another person for the same term. If the depositor’s situation changes and they need the money, they may want to withdraw the deposit early. This would be possible, but there may be a cost. The bank would have to be able to replace the money with a deposit for the same term from a new lender, but it would have to charge a fee to cover the work involved in organising a replacement lender. If the market interest rate had fallen, the first lender may have to cover the interest differential for the rest of the term. This cost should be relatively small, as in a sound financial system interest rates would tend to be very stable.

No comments: