The Airbnb of Wall Street wants to free up trapped bank capital
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5 min read . Updated: 23 May 2022, 06:09 PM IST - Capitolis, backed by JPMorgan and Silicon Valley, is using investor money to help banks do more lending and trading
Wall Street banks are running out of room to keep the markets humming. The sharing economy could hold the solution.
That is the idea behind Capitolis Inc., a startup backed by some of the biggest names on Wall Street and Silicon Valley. In the same way Airbnb turned vacant homes into vacation rentals, Capitolis is turning the unused capital of investing giants like BlackRock Inc. into assets that banks can use to facilitate all kinds of transactions.
Banks play a vital role in the markets, serving as the middleman between buyers and sellers of securities and lending money to businesses. Regulators require them to set aside capital for each of those transactions, creating a buffer meant to shield depositors from losses.
New regulations imposed after the 2008 financial crisis forced banks to grow those capital buffers. Banks took it even further, locking up trillions of dollars that once flowed through the financial system. They became safer but less able to take in all comers, especially in times of market chaos.
Enter Capitolis: It matches investments from asset managers, pension funds and money-market funds with the transactions banks facilitate and underwrite. The firm has raised some $60 billion from investors for the banks to use in the past two years and reduced trillions of dollars in trading positions, said Gil Mandelzis, its founder and chief executive.
JPMorgan Chase & Co. and Citigroup Inc., two of the biggest players in global markets, use Capitolis to free up their traders to work with more clients. The two banks are also Capitolis investors, alongside venture-capital firms Sequoia Capital and Andreessen Horowitz. A March funding round valued the startup at $1.6 billion.
Mr. Mandelzis’s new idea resembles an old one: Banks have long sliced up and sold their big corporate loans to other banks and investors. Capitolis figured out how to use this syndication concept to turn all kinds of banking products—foreign-exchange swaps and lines of credit, to name a few—into a kind of fixed-income security or loan they can sell to investors.
For example, Citigroup owns a basket of equities tied to its clients’ trades. Capitolis, using investor money, essentially mirrors Citigroup’s trades—entering into a derivative contract to take the risk off the bank’s balance sheet. Citigroup is freed up to do more trading, and the investors get a fixed payout.
Capitolis’s plan to outsource banks’ capital needs, while still in its infancy, has the potential to reshape their role in the market and the broader economy. Divorcing the capital required for transactions from the process of executing them could allow banks to serve more customers—businesses and consumers alike—without taking on so much risk that they could blow up the financial system. The goal, the company’s founders say, is a market better able to absorb big spikes in trading volume and loan demand.
“When it’s all over, we will have uncoupled capital from the underwriting equation," said Mr. Mandelzis. “We’re going to look back and wonder how they used to do it when it was bundled."
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Not everyone agrees the banks have retrenched much or that it is a problem if they do. A host of market players—high-frequency traders and nonbank lenders among them—have sprung up to take on the business banks now turn away.
But there is evidence that banks’ capital-hoarding is exacerbating market disruptions. That happened in September 2019, when a cash shortfall caused borrowing costs to spike in a key short-term lending market. It happened again in March 2020, when banks were unable to steady the suddenly volatile market for supersafe U.S. government bonds. Both times, the Federal Reserve had to intervene.
“Before 2008, no one was thinking about the balance sheet," said Tom Glocer, Capitolis’s co-founder and chairman. “Now it drives all the decisions."
Capitolis was born on the tennis court, where Mr. Mandelzis—a one-time bar owner in his native Israel who had become a banker and entrepreneur—had a regular game with Mr. Glocer, a Morgan Stanley director and former CEO of Thomson Reuters.
Between serves, the two men discussed the growing disconnect in finance. Investors and asset managers were flush with cash and looking for new ways to invest it. Banks were turning away potential customers for lack of capital.
Mr. Mandelzis was one of those customers. At the time, he was the CEO of EBS BrokerTec, a fixed-income trading platform whose parent company had bought his first startup. BrokerTec needed a line of credit to cover unexpected margin calls in rough market conditions.
Banks used to hand out these lines of credit to businesses like the lollipops they give to retail customers. But after the financial crisis, regulators made banks hold capital against even undrawn credit lines. Banks, in turn, reserved these once ubiquitous perks for the biggest or most lucrative customers. Everyone else had to pay big or go without.
Mr. Mandelzis said he told BrokerTec’s board a credit line would be expensive but worth it; after all, a credit line could mean the difference of life or death in a crisis. He went to 15 banks. No one would even give him a quote.
An audiobook about the platform economy that birthed Uber and Airbnb provided the inspiration: What if, he asked Mr. Glocer, the same thing was done with capital markets? Along with a third partner, Igor Teleshevsky, they launched Capitolis in 2017.
State Street Corp. was an early customer. The custody bank called on Capitolis in 2018, worried the Fed’s stress test was going to force it to hold more capital against its growing foreign-exchange trading operation, said Tobias Krause, who oversees risk and financial resources for State Street’s markets division. Capitolis found investors to take over the risk after the trades, helping the unit double its trading volume in the past five years.
State Street invested in Capitolis, and Mr. Krause joined its board.
“It helps us free up capital which we can deploy elsewhere," he said.
This story has been published from a wire agency feed without modifications to the text