Traditional bank makes deal with MakerDAO
Huntingdon Valley Bank (HVB) has made an application to onboard loans for use as collateral has gone live on the DeFi project’s platform.
HVB is a 151-year-old community bank based in Philadelphia and has $500m in assets. If its loans are accepted as collateral by MakerDAO, that would mark the first time a traditional lender has been able to borrow against its assets using DeFi.
This is a significant step in what appears to be an acceleration in co-operation between DeFi and TradFi enterprises. For MakerDAO, it shows that DeFi can offer something useful to banks — the ability to sell parts of their loans to a deFi protocol. Called ‘loan syndication’, it is favoured by banks because it lets them rake in more revenue and offload credit risk.
HVB plans to sell its loans to a Delaware Statutory Trust, a business entity which functions like a smart contract. The trust would hold the loans the same way Maker’s smart contracts manage collateral like ETH. In both cases, the party offering up the collateral, be it crypto or a real world loan, can borrow DAI, Maker’s stablecoin against those assets. HVB would sell portions of loans to the trust, and get DAI in return. HVB could then convert DAI to fiat dollars and write more loans. The idea is that this move will let the bank earn more interest from higher loan volume.
This has advantages for HVB. By selling their loans to a trust, they don’t have to do business with their competitors, as is customary in the traditional finance world. Gregory Di Prisco, former head of business development at the Maker Foundation said: “So instead of having to go out there and say, hey you, other small bank, who didn’t do any work in originating this loan, come and take a piece of my economics. Instead, HVB say, hey Maker, who I know will never compete with me because it’s software, why don’t you take a piece of this loan.”
This is just the first step. MakerDAO’s members are considering a proposal to tap real world assets to strengthen its surplus fund, while the Aave Arc lending platform has also been soliciting banks and other traditional financial institutions about making similar kinds of deals.