If you were an owner or investor of a bank, should you really prefer that lending decisions be based on the subjective judgement of loan officers? What if they decide to base their decisions in part on what maximizes their values instead of yours? E.g., demand kickbacks, make loans to their friends or allies, bias their decisions with political ideology, or just slack off when they’re supposed to be interviewing the farmer’s friends and neighbors.
I’d rather people investing on my behalf use objective profit-maximizing criteria, ideally with skin in the game, and that’s why it’s surprising that access to capital depends so much on the kinds of subjective factors you mention (checking whether someone has already been extended credit, whether they’re vibing the right way with VCs or bankers, whether they look like a normal borrower, and in the case I described, whether they took a class prescribed by the credit union) relative to economic considerations.
I have a close friend who was had a business bank account closed for avowedly discretionary reasons after a conversation with a banker where as far as I can tell the banker got spooked because he seemed like he had specific, creative plans that didn’t look normal. (Nothing illegal was discussed; they were thinking about something that might have attracted regulatory scrutiny, but they’d have been happy to negotiate or just look for a different counterparty for those transactions.)
An important case study here is Abacus Bank, the only bank to be prosecuted in relation to the 2008 financial crisis, as far as I can tell simply because they’re culturally decorrelated from other banks (small, ethnically Chinese, privately held). The prosecution didn’t work out, because Abacus hadn’t done any crimes.
I’d rather people investing on my behalf use objective profit-maximizing criteria, ideally with skin in the game, and that’s why it’s surprising that access to capital depends so much on the kinds of subjective factors you mention (checking whether someone has already been extended credit, whether they’re vibing the right way with VCs or bankers, whether they look like a normal borrower, and in the case I described, whether they took a class prescribed by the credit union) relative to economic considerations.
I have a close friend who was had a business bank account closed for avowedly discretionary reasons after a conversation with a banker where as far as I can tell the banker got spooked because he seemed like he had specific, creative plans that didn’t look normal. (Nothing illegal was discussed; they were thinking about something that might have attracted regulatory scrutiny, but they’d have been happy to negotiate or just look for a different counterparty for those transactions.)
An important case study here is Abacus Bank, the only bank to be prosecuted in relation to the 2008 financial crisis, as far as I can tell simply because they’re culturally decorrelated from other banks (small, ethnically Chinese, privately held). The prosecution didn’t work out, because Abacus hadn’t done any crimes.