Author: ZmnSCPxj 2020-07-21 16:28:03
Published on: 2020-07-21T16:28:03+00:00
The traditional banking system provides more than custodial holding of funds in terms of lending and borrowing as one important function is to match long term investments with short or variable term deposits. The Decker-Russell-Osuntokun ("eltoo") mechanism could be used for providing liquidity to borrowers in emergency situations. This mechanism would allow investors to liquidate their early position in the loan agreement, reducing their risk exposure while increasing that of the coordinator. Sophisticated risk analysis systems in the banking industry help banks reinvest a portion of their holdings and obtain profits to cover possible losses when borrowers cannot repay loans fully. This makes them more resilient to defaults and changes in collateral values, allowing borrowers to leverage 1 unit worth of collateral to get 3 units of funds instead of 1. However, it is unclear how this can be implemented by the coordinator and/or investors directly.
Updated on: 2023-06-14T03:07:09.105690+00:00