The banking system has come under scrutiny for its engagement in fractional lending. The practice of creating debt exposes banks to a great deal of risk that can be difficult to control, as was seen during the financial crisis of 2008. Fractional lending is when banks are lending money that is not backed by physical assets. This means that if the borrower defaults on the loan, the bank may not be able to recoup its losses. This type of lending can be very risky, as it can lead to many bad loans on the bank’s books. This can put the bank in a difficult financial position and lead to a loss of confidence from investors.
To manage credit risk more carefully, banks need to consider the potential for customer default when making lending decisions. This means that banks need better understand their customers’ financial situations and histories to make more informed lending decisions, which further creates more financial exclusion and fewer opportunities for people. Many economists and politicians have argued that credit risk needs to be managed more carefully, as banks are essentially taking a risk on behalf of their customers. However, banks are limited companies who need to consider shareholders, and it is our money they are using.
While some may argue that fractional lending is a necessary evil, ARYZE believes that we should deposit our money in a bank or fintech that doesn’t lend out money or create IOUs that are not backed. We can recreate a much more risk-free environment for our money with blockchain technology combined with a full-reserve backing model.