Net Interest

Marc Rubinstein writes about the financial industry in his weekly newsletter Net Interest.

I especially liked his discussion of “front book, back book“. Banks and insurers accumulate a long-term book of assets. These generate a predictable stream of income (interest and premiums). Unfortunately, this “back book” exposes them to unexpected losses. As a result, financial firms need a lot of capital.

The business model of Software-as-a-Service (SaaS) companies is also based on a back book. However, unlike banks, their portfolio of subscribers does not require a lot of capital.

In the same newletter, Rubinstein discusses the possibility of bank M&A funded by badwill, as I suggested earlier.

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