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0 pointstalbo8886mo ago0 comments

It’s almost certainly more profitable to make to make 1,000 $100k loans from a banks point of view as the single loan will be much riskier (effectively not benefiting from the law of large numbers). Not to say there are benefits of dealing large loans such as cross selling other financial products to the large business.

Your second point is totally correct, but it is exacerbated as a result of (broadly good) government policy. A bank wouldn’t mind making uncollateralised loans any more than a mortgage, although it might charge more interest for the risk. However the government penalises banks based on (approximately) the sum of their risk weighted assets [0]. Here mortgages, as collateralised loans, are greatly incentivised over uncollateralised loans to business.

It’s hard to say if the situation would be worse without it, it’s possible we might have more risky business loans leading to growth, but also more likely we could see a serious global financial crisis.

[0] I am simplifying here slightly but you can see how the US ranks major banks here, higher is worse from the banks point of view https://www.fsb.org/uploads/P261124.pdf

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chaseadam176mo ago

Yes, one $100M loan in isolation is risky (I was just giving an example), but my point was that a portfolio of a small number of large loans to big businesses is much more profitable than a portfolio of many more smaller loans to small businesses. Large companies are much less likely to go bankrupt and the overhead of making the loan relative to the profit from interest is much lower. 50% of small businesses go bankrupt in the first 5 years. It's simply less profitable to lend to them...

blibble6mo ago

they won't hold the risk for very long at all

because the bank will immediately sell the loan on

(but they will have collected a fee on both sides...)

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