Safer Lending (Oversimplified)
How the financial crisis happened:
Bank: Hello, how can I help you?
Loaner: I would like some money
Bank: Ok, how much? £2,500? £3,000?
Loaner: No, £250,000
The bank didn’t check their loan history and didn’t get their money back.
(The bank shoots a plastic arrow at their left foot).
Bank: Hi, how can I help?
Loaner: I would like a little loan
Bank: how much?
Bank: You can have the loan IF you can pay it back
Loaner: Ok, I’ll pay it back
The loaner doesn’t pay the loan back
(The bank shoots another plastic arrow at his right leg)
Bank: Hi, why are you at the bank today?
Loaner: To borrow some money, I would like a small loan, maybe £10,000 or £15,000
Bank: Ok! You can have £20,000 because my boss says I can have a BIG bonus if I loan someone more than £19,000.
Loaner: OK, bye
The loaner doesn’t pay back the loan
(The bank shoots a third plastic arrow at their forehead. This is how the financial crisis happened because no one was paying back their loans).
We will look at three types of rules that will make banks safer.
Safer Rules for Banks: Check History loan before signing!
This means banks HAVE to check
The loaner’s loan history before
Loaning to them, so banks don’t lose
Any money. EASY!
Safer rules for banks:
Check before signing the important piece of paper, then recheck, then recheck, then… sign!
Bankers should only get little bonuses for getting more money.
I think these ideas would be helpful for banks because they won’t lose money as easily like what happened in the financial crisis in 2008.