“We must resist the forces of gravity that want to preserve the – broken – status quo,” he declares. “You wouldn’t design the banking system as it is today; why would we keep it this way?”
An invited audience hear from Lewis about the inherent contradiction at the heart of banking. “Banks somehow came to be the guardians of certainty, in spite of the fact that they themselves are riddled with uncertainty,” he says.
Rhydian Lewis, RateSetter
His solution is for the banks to stick to what they can do safely – make payments – while marketplace lenders take on the role of lending instead. He argues this is a more logical industry structure.
“The lending of deposits itself is a fundamentally misconceived concept that is bound to fail again,” he says. “In its place we should look, first and foremost, to investment capital – risk capital – to fund loans.”
If marketplaces lend rather than banks, he says, there will be no promise of safety and therefore no call upon government to act as a back stop. “Too-big-to-fail and moral hazard disappear,” he says.
Lewis is highly critical of bank deposit insurance, describing it as a weakness and cost of the present system that is necessary because of the inherent flaws in that system.
However, RateSetter itself runs a provision fund, which takes a risk-weighted contribution from each borrower to cover losses from loans as they occur – so a kind of insurance in itself. Is this not in effect a guarantee?
Lewis says: “This question is completely fair. We are not trying to become a system that provides a guarantee but this gives people some comfort.”
A bit like… deposit insurance does? He is alarmingly honest when pressed by an investor on how RateSetter prices risk, given that it is a new business that hasn’t been through a cycle yet: “We use our own large data set, but it is not a guarantee,” he shrugs. “It might be wrong.”
Indeed, it is his observation about what would happen in this eventuality that really sets such lenders apart from the banks. “If we get it wrong, we don’t expect to survive,” he says.