MakerDao’s Loan Syndication Proposal With Traditional Banks To Allow Offload Credit Risks

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DeFi is blurring the lines between traditional finance and fintech. 

An application to onboard Huntingdon Valley Bank (HVB) loans as collateral has been posted on the MakerDAO platform’s forum.

Overview of the proposed transaction framework.

151 years old and with $500M in assets, HVB is a community bank based in the suburbs of Philadelphia. The first time a traditional lender could use DeFi to borrow against its assets would be if its loans are accepted as collateral by MakerDAO, according to the protocol’s Twitter account.

Loan Syndication

Syndicating loans by makerdao appears to be accelerating the cross pollination between DeFi and TradFi enterprises. There is a proposal among MakerDAO’s members to increase its surplus fund by tapping real world assets. Additionally, Aave Arc has solicited banks and other traditional institutions to use its platform. 

This shows MakerDAO that DeFi can offer banks a useful feature – the ability to sell parts of their loans in a process called “loan syndication” to a protocol. Syndication gives banks more revenue and allows them to offload credit risk. 

The Defiant reports that HVB plans to sell its loans to a Delaware Statutory Trust, which, according to Gregory Di Prisco, former head of business development at the Maker Foundation before it was dissolved, functions like a smart contract. 

Real World Loan

Loans would be held in the trust in the same way that Maker’s smart contracts handle ETH collateral. Both crypto and real world collateral allow the party that offers them up to borrow Maker’s stablecoin, DAI, against those assets. Quite complex, actually. DAI would receive a portion of loans HVB sells to the trust. If HVB converted DAI to fiat dollars, it could then write more loans. Through this move, the bank hopes to earn more interest from higher loan volumes. 

HVB also benefits from this move. To help bridge the gap between institutional borrowers and DeFis, small banks usually sell portions of their loans to competitors to satisfy regulatory requirements. In the traditional finance world, lenders usually deal with their competitors when selling loans to trusts. 


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