Money does not grow on trees. In good times risk creates a better return on investment, in bad times risk is to be blamed. There is not an endless supply of money, there is a real supply chain of money in the UK and globally.
Banks hold our money, lend us money and act as a profit Centre but few actually understand risk. They deploy ‘clever software’ or algorithms to decide how much they can lend to businesses or individuals. The money might come from the savers within the bank, or even in the short term from other businesses within the bank, it might be a bank bond to support extra lending, other banks or even the central bank based on a loan.
Lending is risky, so is the supply and reporting of how the money is lent. The Bank of England has asked the bank to reduce risky lending on things like credit cards. However, they can fudge the figure, to show both good returns to investors and safe lending to the FCA and the Bank of England. However, only in the quarterly report does the FCA, BOE or investor understand where the money supply has come from.
Bear Stearns had two great systems running at the same time, the first, every Friday it would send all money to America to support the USA bank. Therefore showing it was solvent. The second, the toxic book debts (bad loans) would, one week, before the quarter end be sold under a repurchase contract for 108% of face value. This means the trading arm at least broke even. These two real-world examples show that no matter what you report a bank can carry on with a low supply of money. Since the credit agencies and authorities only saw a snapshot of the lending in a quartile balance sheet they were unable to drill down to the details.
Enter blockchain, no trade is lost, no trade can be changed. Same day reporting and the option of seeing those smart contracts behind the trade could be a reality. The bank will know its true worth, which in turn affects the tier one capital ratio, as part of a stress test. The lenders can feel happy about supplying overnight or ongoing support to the bank.
Blockchain in a financial supply context will present an immutable truth. Cryptographically hashed transactions will allow for total transparency between financial institutions and regulators. The technology to mitigate risks in a financial institutions supply chain is ready, the question is, are the banks ready to reveal all?
© Yotta Laboratories